Taxation The Peoples Business

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TAXATION:
THE PEOPLE'S BUSINESS

THE MACMILLAN COMPANY

NEW YORK • BOSTON • CHICAGO • DALLAS
AILANTA • SAN FRANCISCO

MACMILLAN & CO., LIMITED

LONDON • BOMBAY • CALCUTTA
MELBOURNE

TIIE MACMILLAN CO. OF CANADA. LTD.

TORONTO

„ TAXATION:
THE PEOPLE'S BUSINESS

BY

ANDREW W. MELLON

gfocfc

THE MACMILLAN COMPANY
1924

All rights reserved

COPYRIGHT, 1924,
Br THE MAOMILLAN COMPANY.

Set up and printed.
Published April, 1924.

Printed in the United States of America by

J. J. LITTLE AND IVES COMPANY, NEW YORK

PREFACE

Many of the views on taxation herein ex-
pressed have appeared from time to time in
letters to Committees of Congress and to
various organizations and individuals. It
has seemed worth while to collect these views
and publish them in a compact form, to which
are appended also various tables and docu-
ments of possible interest to students of taxa-
tion. I am indebted to The Forwm magazine,
The Independent, and others for permission
to publish excerpts from articles. I also wish
to express my indebtedness to Mr. S. Parker
Gilbert, former Under Secretary of the
Treasury, and to the Under Secretary of
the Treasury, Mr. Garrard B. Winston, for
the invaluable assistance which he has ren-
dered not only in the preparation of this
book but in the conduct of the public business
of the Treasury.

A. W. MELLON.
Washington,
April, 1924.

CONTENTS

CHAPTER PAGI

I FUNDAMENTAL PRINCIPLES .... 9

II THE \SURY POLICIES 25

III REVISING THE TAXES 51

IV SURTAXES 69

V TAXING ENERGY AND INITIATIVE . . 93

VI ESTATE TAXES Ill

VII BENEFITS OF TAX REDUCTION . . . 127

VIII TAX-EXEMPT SECURITIES .... 141
APPENDIX 175

CHAPTER I
FUNDAMENTAL PEINCIPLES

TAXATION: THE PEOPLE'S
BUSINESS

CHAPTJBR I

FUNDAMENTAL PBINCIPI^ES

THE problem of the Government is to fix
rates which will bring in a maximum amount
of revenue to the Treasury and at the same
time bear not too heavily 011 the taxpayer or
on business enterprises. A sound tax policy
must take into consideration three factors.
It must produce sufficient revenue for the
Government; it must lessen, so far as possi-
ble, the burden of taxation on those least
able to bear it ; and it must also remove those
influences which might retard the continued
steady development of business and industry
on which, in the last analysis, so much of our
prosperity depends. Furthermore, a perma-

9

10 TAXATION: THE PEOPLE'S BUSINESS

nent tax system should be designed not
merely for one or two years nor for the effect
it may have on any given class of taxpayers,
but should be worked out with regard to
conditions over a long period and with a
view to its ultimate effect on the prosperity
of the country as a whole.

These are the principles on which the
Treasury's tax policy is based, and any re-
vision of taxes which ignores these funda-
mental principles will prove merely a make-
shift and must eventually be replaced by a
system based on economic, rather than po-
litical, considerations.

There is no reason why the question of
taxation should not be approached from a
non-partisan and business viewpoint. In re-
cent years, in any discussion of tax revision,
the question which has caused most contro-
versy is the proposed reduction of the sur-
taxes. Yet recommendations for such re-
ductions have not been confined to either
Republican or Democratic administrations.
My own recommendations on this subject

FUNDAMENTAL PKINCIPLES 11

were in line with similar ones made by
Secretaries Houston and Glass, both of whom
served under a Democratic President. Tax
revision should never be made the football
either of partisan or class politics but should
be worked out by those who have made a
careful study of the subject in its larger
aspects and are prepared to recommend the
course which, in the end, will prove for the
country's best interest.

I have never viewed taxation as a means
of rewarding one class of taxpayers or pun-
ishing another. If such a point of view ever
controls our public policy, the traditions of
freedom, justice and equality of opportunity,
which are the distinguishing characteristics
of our American civilization, will have dis-
appeared and in their place we shall have
class legislation with all its attendant evils.
The man who seeks to perpetuate prejudice
and class hatred is doing America an ill serv-
ice. In attempting to promote or to defeat
legislation by arraying one class of taxpay-
ers against another, he shows a complete

12 TAXATION: THE PEOPLE'S BUSINESS

misconception of those principles of equality
on which the country was founded. Any man
of energy and initiative in this country can
get what he wants out of life. But when that
initiative is crippled by legislation or by a
tax system which denies him the right to
receive a reasonable share of his earnings,
then he will no longer exert himself and the
country will be deprived of the energy on
which its continued greatness depends.

This condition has already begun to make
itself felt as a result of the present unsound
basis of taxation. The existing tax system
is an inheritance from the war. During that
time the highest taxes ever levied by any
country were borne uncomplainingly by the
American people for the purpose of defray-
ing the unusual and ever-increasing expenses
incident to the successful conduct of a great
war. Normal tax rates were increased, and
a system of surtaxes was evolved in order to
make the man of large income pay more pro-
portionately than the smaller taxpayer. If
he had twice as much income, he paid not

FUNDAMENTAL PRINCIPLES 13

twice, but three or four times as much tax.
For a short time the surtaxes yielded a large
revenue. But since the close of the war peo-
ple have come to look upon them as a busi-
ness expense and have treated them accord-
ingly by avoiding payment as much as pos-
sible. The history of taxation shows that
taxes which are inherently excessive are not
paid. The high rates inevitably put pressure
upon the taxpayer to withdraw his capital
from productive business and invest it in
tax-exempt securities or to find other law-
ful methods of avoiding the realization of
taxable income. The result is that the
sources of taxation are drying up ; wealth is
failing to carry its share of the tax burden;
and capital is being diverted into channels
which yield neither revenue to the Govern-
ment nor profit to the people.

Before the period of the war, taxes as high
as those now in effect would have been
thought fantastic and impossible of payment.
As a result of the patriotic desire of the
people to contribute to the limit to the sue-

14 TAXATION: THE PEOPLE'S BUSINESS

cessful prosecution of the war, high taxes
were assessed and ungrudgingly paid. Upon
the conclusion of peace and the gradual re-
moval of war-time conditions of business, the
opportunity is presented to Congress to
make the tax structure of the United States
conform more closely to normal conditions
and to remove the inequalities in that struc-
ture which directly injure our prosperity
and cause strains upon our economic fabric.
There is no question of the fact that if the
country is to go forward in the future as it
has in the past, we must make sure that all
retarding influences are removed.

Adam Smith, in his great work, " Wealth
of Nations/' laid down as the first maxim
of taxation that "The subjects of every state
ought to contribute toward the support of
the Government, as nearly as possible, in
proportion to their respective abilities, " and
in his fourth and last maxim, that " Every
tax ought to be so contrived as both to take
out and to keep out of the pockets of the
people as little as possible over and above

FUNDAMENTAL PRINCIPLES 15

what it brings into the public treasury of
the state," citing as one of the ways by
which this last maxim is violated a tax which
"may obstruct the industry of the people,
and discourage them from applying to cer-
tain branches of business which might give
maintenance and employment to great mul-
titudes. . . . While it obliges the people to pay,
it may thus diminish, or perhaps destroy,
some of the funds, which might enable them
more easily to do so."

The further experience of one hundred
and fifty years since this was written has
emphasized the truth of these maxims, but
those who argue against a reduction of sur-
taxes to more nearly peace-time figures cite
only the first maxim, and ignore the fourth.
The principle that a man should pay taxes
in accordance with his "ability to pay" is
sound but, like all other general statements,
has its practical limitations and qualifica-
tions, and when, as a result of an excessive
or unsound basis of taxation, it becomes evi-
dent that the source of taxation is drying

16 TAXATION: THE PEOPLE'S BUSINESS

up and wealth is being diverted into unpro-
ductive channels, yielding neither revenue
to the Government nor profit to the people,
then it is time to readjust our basis of taxa-
tion upon sound principles.

It seems difficult for some to understand
that high rates of taxation do not necessarily
mean large revenue to the Government, and
that more revenue may often be obtained by
lower rates. There was an old saying that
a railroad freight rate should be "what the
traffic will bear"; that is, the highest rate at
which the largest quantity of freight would
move. The same rule applies to all private
businesses. If a price is fixed too high, sales
drop off and with them profits ; if a price is
fixed too low, sales may increase, but again
profits decline. The most outstanding recent
example of this principle is the sales policy
of the Ford Motor Car Company. Does any
one question that Mr. Ford has made more
money by reducing the price of his car and
increasing his sales than he would have
made by maintaining a high price and a

FUNDAMENTAL PEINCIPLES 17

greater profit per car, but selling less cars?
The Government is just a business, and
can and should be run on business prin-
ciples.

Experience has shown that the present
high rates of surtax are bringing in each
year progressively less revenue to the Gov-
ernment. This means that the price is too
high to the large taxpayer and he is avoiding
a taxable income by the many ways which
are available to him. What rates will bring
in the largest revenue to the Government ex-
perience has not yet developed, but it is
estimated that by cutting the surtaxes in
half, the Government, when the full effect
of the reduction is felt, will receive more
revenue from the owners of large incomes
at the lower rates of tax than it would have
received at the higher rates. This is simply
an application of the same business prin-
ciple referred to above, just as Mr. Ford
makes more money out of pricing his cars at
$380 than at $3,000.

Looking at the subject, therefore, solely

18 TAXATION: THE PEOPLE'S BUSINESS

from the standpoint of Government rev-
enues, lower surtax rates are essential. If
we consider, however, the far more impor-
tant subject of the effect of the present high
surtax rates on the development and pros-
perity of our country, then the necessity for
a change is more apparent. The most note-
worthy characteristic of the American peo-
ple is their initiative. It is this spirit which
has developed America, and it was the same
spirit in our soldiers which made our armies
successful abroad. If the spirit of business
adventure is killed, this country will cease
to hold the foremost position in the world.
And yet it is this very spirit which excessive
surtaxes are now destroying. Any one at
all in touch with affairs knows of his own
knowledge of buildings which have not been
built, of businesses which have not been
started, and of new projects which have been
abandoned, all for the one reason — high sur-
taxes. If failure attends, the loss is borne
exclusively by the adventurer, but if success
ensues, the Government takes more than

FUNDAMENTAL PRINCIPLES 19

half of the profits. People argue the risk is
not worth the return.

With the open invitation to all men who
have wealth to be relieved from taxation by
the simple expedient of investing in the more
than $12,000,000,000 of tax-exempt securities
now available, and which would be unaf-
fected by any Constitutional amendment, the
rich need not pay taxes. We violate Adam
Smith's first maxim. Where these high sur-
taxes do bear, is not on the man who has
acquired and holds available wealth, but on
the man who, through his own initiative, is
making wealth. The idle man is relieved ; the
producer is penalized. We violate the fourth
maxim. We do not reach the people in pro-
portion to their ability to pay and we de-
stroy the initiative which produces the
wealth in which the whole country should
share, and which is the source of revenue to
the Government.

In considering any reduction the Govern-
ment must always be assured that taxes will
not be so far reduced as to deprive the Treas-

20 TAXATION: THE PEOPLE'S BUSINESS

ury of sufficient revenue with which properly
to run its business with the manifold activ-
ities now a part of the Federal Government
and to take care of the public debt. Tax
reduction must come out of surplus revenue.
In determining the amount of surplus avail-
able these factors control: the revenue re-
maining the same, an increase in expendi-
tures reduces the surplus, and expenditures
remaining the same, anything which reduces
the revenue reduces the surplus. The reac-
tion, therefore, of the authorization of
extraordinary or unsound expenditures is
twofold — it serves, first, to raise the expen-
ditures and so narrow the margin of avail-
able surplus ; and, second, to decrease further
or obliterate entirely this margin by a re-
duction of the Treasury's revenues through
the disturbance of general business, which
is promptly reflected in the country's income.
On the other hand, a decrease of taxes
causes an inspiration to trade and commerce
which increases the prosperity of the coun-
try so that the revenues of the Government,

FUNDAMENTAL PRINCIPLES 21

even on a lower basis of tax, are increased.
Taxation can be reduced to a point appar-
ently in excess of the estimated surplus, be-
cause by the cumulative effect of such
reduction, expenses remaining the same, a
greater revenue is obtained.

High taxation, even if levied upon an eco-
nomic basis, affects the prosperity of the
country, because in its ultimate analysis the
burden of all taxes rests only in part upon
the individual or property taxed. It is
largely borne by the ultimate consumer.
High taxation means a high price level and
high cost of living. A reduction in taxes,
therefore, results not only in an immediate
saving to the individual or property directly
affected, but an ultimate saving to all people
in the country. It can safely be said, that a
reduction in the income tax reduces expenses
not only of the income taxpayers but of the
entire 110,000,000 people in the United
States. It is for this basic reason that the
present question of tax reform is not how
much each individual taxpayer reduces his

22 TAXATION: THE PEOPLE'S BUSINESS

direct contribution, although this, of course,
is a powerful influence upon the individual
affected; the real problem to determine is
what plan results in the least burden to the
people and the most revenue to the Govern-
ment.

CHAPTER II
TREASURY POLICIES

CHAPTER II
TREASURY POLICIES

SINCE the war two guiding principles have
dominated the financial policy of the Govern-
ment. One is the balancing of the budget, and
the other is the payment of the public debt.
Both are in line with the fundamental policy
of the Government since its beginning.

Alexander Hamilton, whose genius was re-
sponsible for the establishment of our finan-
cial system, early committed this Government
to a policy of debt payment and keeping ex-
penditures within income. "It will be the
truest policy of the United States, " he said,
"to give all possible energy to public credit
by a firm adherence to its strictest maxims ;
and yet, to avoid the ills of an excessive em-
ployment of it, by true economy and system
in the public expenditure, by steadily culti-
vating peace, and by using sincere, efficient

25

26 TAXATION: THE PEOPLE'S BUSINESS

and persevering endeavors to diminish pres-
ent debts, prevent the accumulation of new
and secure the discharge, within a reasonable
period, of such as it may be at any time a
matter of necessity to contract."

In accordance with this policy the nation
from the very beginning began to pay its
debts. Under Hamilton's leadership the
debts incurred by the various States in the
prosecution of the Revolutionary War were
assumed by the new nation then struggling
into existence, and immediate provisions
were made for funding and gradually liqui-
dating these obligations. Hamilton proposed
a sinking fund, through whose operation,
with later modifications, the debt was dis-
charged within a reasonable number of years.

The policy thus inaugurated has been ad-
hered to by succeeding administrations. Out
of surplus revenues the public debt has been
gradually paid off, so that at the time of our
entrance into the World War, in April, 1917,
the net public debt was slightly more than
one billion dollars. The United States fol-

TREASURY POLICIES 27

lowed its traditional policy of financing the
war partly by taxation and partly by bor-
rowing. In accordance with this policy the
Government raised money in the following
manner: (1) by borrowing on long-time
bonds; (2) by increasing taxation sufficiently
to meet all debt charges out of current in-
come; and (3) by issuing Treasury certifi-
cates to raise funds until the proceeds from
the loans and taxes should become available.
So far as possible, inflation was avoided
by observing the principle that war loans, ob-
tained by credit, must rest on the solid basis
of taxation. Taxes were increased sufficiently
to provide at least for interest on the loans
and payment on a sinking fund which will
discharge the debt in a reasonable period.
Some inflation, however, was unavoidable, for
loans, so far as they are not paid out of sav-
ings but by the banks or by individuals with
advances from the banks, lead to inflation;
and likewise taxes on income, so high that
business is forced to borrow from the banks
in order to make payment, also add to infla-

28 TAXATION: THE PEOPLE'S BUSINESS

tion. Most of the European countries, except
Great Britain, attempted to finance the war
largely on borrowing. America, on the other
hand, attempted to raise one-third of the cur-
rent war expenditures by taxation.

During the war many new taxes, such as
Income and Excess Profits Taxes, were de-
veloped. There is a limit, however, to the
amount of taxes that can be levied without
absorbing the profits which should be put
back into business for increased production.
That limit is measured, not by the total in-
come of the consumer, but by the surplus
income which is the excess of net income over
consumption. If too much of this surplus
is taken in taxes, the margin available for
capital investment and for support of edu-
cational, religious and philanthropic insti-
tutions is perilously reduced. If the sources
of capital investment are dried up, the flow
of all income may eventually cease. For
these reasons the Government must judge
with great care the amount of tax to be levied
on wealth.

TREASURY POLICIES 29

The cost of a great war, however, cannot
be borne entirely by taxes. It must be
financed in part by credit, which can be ac-
complished by long-time loans. In this way,
the burden can be distributed over a term
of years in such a way that too great pay-
ment does not fall on the taxpayers of any
one year. Throughout its history the United
States has followed the policy laid down by
Hamilton of so funding the public debt that
it can be liquidated without undue hardship.
At the same time, the policy has been strictly
adhered to that expenditures for the ordinary
operations of the Government must be dis-
charged out of current receipts raised from
taxes. Part of the public debt must be paid
each year out of current revenues, and such
debt as is not paid off must be refunded and
the whole eventually extinguished by paying
from year to year the amounts accumulated
in the sinking fund. The amount of the
yearly payments must be determined by the
taxes levied for the purpose, and the rate of
taxation should at no time be so excessive as

30 TAXATION: THE PEOPLE'S BUSINESS

to discourage the hope of gain on the part of
the individual taxpayer.

Many people cling to the old policy that
debt retirement is bad for business, being
the reverse of inflated conditions accom-
panying vast borrowings. They hold that
new borrowings with reduced taxes are pref-
erable to higher taxes with reduced debts.
But a moment's reflection will convince any
one that prosperity cannot come from con-
tinued plunging into debt. The present con-
dition of Germany is the best proof of the
danger of inflation and financial pyramiding.
As a matter of fact, orderly debt retirement
out of surplus revenues is better calculated
to restore prosperity, for the debt is retired
by taxes paid in for the purpose and the
money retained for the payment of such taxes
is saved from being dissipated in useless ex-
penditure. The payment of debts is particu-
larly desirable when the nation's obligations,
as in the case of the United States, arc owed
to its own people. All payments of interest
and principal are put back into circulation

TREASURY POLICIES 31

within the country. It may seem to be tak-
ing money out of one pocket in the form of
taxes and putting it back in the other pocket
in the guise of interest and part payment of
the principal on bonds. But there are two
distinctions to be noted: (1) not every tax-
payer owns bonds, hence it is an advantage
for the Government no longer to support the
bondholders by the payment of interest col-
lected as taxes from the nation at large; (2)
the payments of principal on bonds are in
sums that will find their way back into capi-
tal investments, whereas, if no payments are
made and taxes remain uncollected, this
amount will be dissipated as income in useless
expenditures.

T.he United States has followed a sound
policy in regard to payment of the war debt.
It has appropriated annually a sum in ex-
cess of interest charges, the surplus being de-
voted to the reduction of the principal of the
debt. The keynote of its policy in this re-
gard, as the late President Harding stated in
his first address to Congress, has been "or-

32 TAXATION: THE PEOPLE'S BUSINESS

derly funding and gradual liquidation." In
the five full fiscal years since the end of hos-
tilities in the World War, the Government
has been able to balance its budget and the
Treasury has therefore been in the position
to make important progress within the same
period in the handling of the war debt. On
April 30, 1921, when the Treasury announced
its refunding program, the gross public debt
amounted to about 24 billion dollars, of which
over TVa billion dollars was short-dated debt
maturing within about two years. The Treas-
ury was faced with the necessity not only of
relieving business of the heavy tax burden
imposed during the war but also of retiring
or refunding the early maturing debt with-
out disturbance to business and industry.

The Treasury completed during the fiscal
year ending June 30, 1923, the first phase of
its refunding program, and by the end of the
year all of the $7,500,000,000 of short-dated
debt maturing during the previous two and
one-half years had been either retired or re-
funded into more manageable maturities.

TREASURY POLICIES 33

Except for the issue of about $750,000,000 of
25-30 year Treasury bonds in the fall of 1922,
the refunding has all been on a short-term
basis, and it has been arranged with a view
to distributing the early maturities of debt
at convenient intervals over the period be-
fore the maturity of the third Liberty Loan
in 1928 in such manner that surplus revenues
may be applied most effectively to the grad-
ual reduction of the debt.. With this object
in view all of the short-term notes issued in
the course of the refunding have been given
maturities on quarterly tax-payment dates,
and all outstanding issues of Treasury certifi-
cates have likewise been reduced to tax ma-
turities.

The following table shows in summary
form the distribution of the interest-bearing
debt by maturities at various dates since
August 31, 1919, when the gross debt reached
the peak. From this table it will be seen that
on March 31, 1924, the public debt had been
reduced nearly five billion dollars from its
highest point in 1919. In place of the old

34 TAXATION: THE PEOPLE'S BUSINESS

sT

One
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TREASURY POLICIES 35

short-dated debt, there has been substituted
a new class of short-dated debt, aggregating
on March 31, 1924, about $8,327,000,000, ma-
turing within five years from that date.

This Government has followed the sound
policy of balancing its budget from year to
year, ordinary receipts against ordinary ex-
penditures, and including as ordinary expen-
ditures for budget purposes the sinking fund
and other debt retirements properly charge-
able against ordinary receipts. This means
that provision must be made for expenditures
on account of interest and retirement of the
war debt before the Budget can balance ; and
a balanced budget each year indicates a rea-
sonable amount of debt retirement out of cur-
rent revenues. To do otherwise would, of
course, make a farce of the sinking fund, for
on any other basis purchases of obligations
for retirement on this account would accom-
plish no debt retirement whatever and would
mean simply a shifting of borrowing from
one form to another.

Under the Budget system it is now pos-

36 TAXATION: THE PEOPLE'S BUSINESS

sible for the Treasury to know in advance
approximately the aggregate of expenditures
for which it must provide funds during the
year. To become completely effective the
Budget should embrace all Government ex-
penditures, including those which, in the
guise of revolving funds and indefinite ap-
propriations, do not now appear in the
Budget at all.

The Budget cannot reflect the true state of
Government finances until Congress puts an
end to the practice, initiated during the war,
of authorizing expenditures by means of in-
definite or revolving-fund appropriations.
The Constitution expressly provides that "no
money shall be drawn from the Treasury but
in consequence of appropriations made by
law; and a regular statement of the receipts
and expenditures of all public money shall be
published from time to time." This Consti-
tutional requirement has been evaded by di-
verting Government funds before they are
covered into the Treasury. At the same time
the Treasury is rendered unable to perform

TREASURY POLICIES 37

its Constitutional function of publishing "a
regular statement of the receipts and expen-
ditures of all public money."

Such indefinite appropriations not only con-
ceal how much money is being spent, but fre-
quently conceal even the fact of an appropri-
ation being made. By means of indirect and
indefinite appropriations of this character,
hundreds of millions are spent which, if a
direct appropriation were necessary, could
never be authorized. In fact the practice has
reached such proportions as to be a matter of
grave concern, and it was vigorously de-
nounced by President Harding in one of his
annual messages. It has become the first
principle of strategy on the part of people
interested in appropriations for various spe-
cial purposes to frame the matter so as to
authorize the use of the public funds indi-
rectly, or in indefinite terms, or by authoriza-
tions for expenditure of unexpended balances,
perhaps appropriated originally for other
purposes, or by authorizations to divert Gov-
ernment receipts before they ever reach the

38 TAXATION: THE PEOPLE'S BUSINESS

Treasury. In order to accomplish this end
efforts are made to find general words which
do not speak in terms of appropriations and
cannot be readily calculated.

However necessary these practices may
have been during the war in order to give
greater freedom of administrative action in
the use of public funds, they are utterly in-
defensible in time of peace. By diverting
funds before they reach the Treasury, Con-
gress is creating the dangerous precedent of
allowing Government money to be expended
without the direct control of Congress or the
supervision of the Treasury. The disposition
of vast funds is put into the hands of adminis-
trative officers of various departments or
Government agencies, without limitations as
to their use; and a situation is thus created
which not only is contrary to the intent of the
Constitution but is also unscientific and dan-
gerous in the extreme.

Throughout the world, the process of defla-
tion has been retarded by the system of sub-
sidies prevalent in so many countries. The

TREASURY POLICIES 39

war loft in its train many economic hard-
ships. Many classes of producers suffered
from lack of demand for their products, while
the consuming classes were forced to pay ex-
tortionate prices for articles in which a
scarcity existed, such as houses, bread and
coal. Various measures have been taken to
remedy these conditions. Subsidies have been
granted to some industries to encourage pro-
duction until the demand should become nor-
mal; and bonuses have been granted to re-
lieve certain classes of consumers burdened
by the high prices of necessaries. Such ef-
forts to regulate the law of supply and de-
mand have generally proved ineffective, and
in many European countries have resulted
in expenditures by the state for which no
adequate income could be found.

A bonus or subsidy can be paid only by tak-
ing money out of the pockets of all the people
in order that it shall find its way back into
the pockets of some of the people. It ac-
complishes nothing less than a redistribution
of the wealth of the country by governmental

40 TAXATION: THE PEOPLE'S BUSINESS

operation, and constitutes a bad precedent,
which is likely to prove more and more ex-
pensive to the country with each surrender to
organized pressure.

It is of the utmost importance that expen-
ditures should be kept down to the minimum
requirements of the Government and that the
Budget should balance, for, in a world of dis-
ordered governmental finances, the United
States owes it to itself to keep its house in
order and balance its Budget as it has done
in the last five years.

The aggregate of Government expendi-
tures subject to modification by executive con-
trol is comparatively small in amount. Such
items as payment of the public debt, trust
fund investments, pensions, appropriations
for Indians, Customs and Internal Revenue,
and, for the most part, veterans' relief can-
not be reduced by the executive departments.
The attached table (Appendix F), shows the
large amount of fixed charges which the
Government must meet each year.

The diagrams on pages 42, 43 present in

TREASURY POLICIES 41

graphic form the percentage distribution of
receipts and expenditures for the fiscal year
1923 and may be taken as fairly typical of
conditions which the Government is facing in
the next few years.

The Government's expenditures may be di-
vided into two classes, as follows:

Class 1.

War Department 10.62%

Navy Department 9.01%

Sinking Fund and other debt retirements . 10.89%

Interest on the public debt 28.56%

Veterans' Bureau 12.49%

Pensions 7.19%

Total 78.76%

Class 2.

Trust fund investments 95%

Indians 1.22%

Refunds 4.17%

Good roads 2.15%

Operations in special accounts 1.33%

All other expenditures 11.42%

Total 21.24%

From the above, it will be seen that wars,
past and future, are responsible for the con-
sumption of over three-fourths of the public
revenue. It is time to face the facts and rec-
ognize that, in spite of the utmost economy
that can be effected in administration, the

42 TAXATION: THE PEOPLE'S BUSINESS

DIAGRAM I

ORDINARY RECEIPTS OF THE GOVERNMENT

FISCAL YEAR ENDED JUNE 30,1923
TOTAL =84,007,135.481.

TREASURY POLICIES

43

DIAGRAM Z

GOVERNMENT EXPENDITURES CHARGEABLE AGAINST
ORDINARY RECEIPTS

FISCA'L YEAR ENDED JUNE 30,1923
TOTAL = * 3.697. 478.OEO

REFUNDS

4 17 %

PENSIONS 7 19 %

INTEREST

ON PUBLIC DEBT

28 36%

NAVY

DEPARTMENT
901 %

VETERANS' BUREAU

12.49%

WAR

DEPARTMENT
10.62.%

44 TAXATION: THE PEOPLE'S BUSINESS

cost of government cannot be greatly reduced
so long as wars continue to recur with their
aftermath of vastly increased expenditures.

Class 2 on page 41 shows where reductions
in expenditures must be made. The Army and
Navy have already been reduced to the limit
consistent with national safety. From the
comparatively small amount devoted to the
operation of the Government departments,
only a limited amount can be saved; and if
any drastic reduction is to be made in ex-
penditures, the public debt must be paid in
order to stop the tremendous interest
charges which are paid each year out of taxes.

There are two means of debt retirement;
first, repayments on loans made to foreign
nations, and second, the operation of the
Sinking Fund. As regards foreign loans, the
law authorizes that repayments may be made
in United States Government bonds and
notes; and such repayments as have been
received to date from Great Britain have been
almost entirely in Liberty Bonds, which are
accepted at par and accrued interest in pay-

TREASURY POLICIES 45

ment of an equal amount of foreign debt.
The Liberty Bonds received in this way by
the United States Government are imme-
diately cancelled and a corresponding reduc-
tion made both in the foreign debt arid in the
public debt of the United States. The trans-
action is merely a paper one and brings no
revenue into the Treasury.

It is absolutely necessary that a sound
policy of debt retirement be followed and that
repayments of the " foreign loans " be ap-
plied in reduction of the debt owed by the
United States to the holders of Liberty
Bonds. The Victory Liberty Loan Act pro-
vided for a "Sinking Fund" or annual ap-
propriation which, added to repayments re-
ceived from foreign governments, would re-
tire the public debt within a reasonable
period.

The money represented by these loans to
foreign governments was borrowed in the
first place by the United States from its own
citizens, to whom Liberty Bonds and Victory
Notes were given in exchange. The funds, as

46 TAXATION: THE PEOPLE'S BUSINESS

everyone knows, have already been spent by
the foreign debtor nations in the successful
prosecution of the war, and, when these funds
are repaid to this Government, the latter
must, in honesty to the holders of Liberty
Bonds, buy up and cancel those bonds; or,
if repayments are made by foreign govern-
ments in the form of Liberty Bonds, then
these securities, which cannot be reissued,
must be retired and the public debt reduced
by a corresponding amount.

In view of the great carrying charge of the
debt, it would secin imperative that the debt
be reduced as rapidly as possible and that no
further obligations be incurred in the form of
unusual or extraordinary expenditures. In
so far as this Government is concerned, its
policy has been to keep its own house in or-
der, to maintain the gold standard unim-
paired, to balance its budget and to carry out
a reasonable program for the orderly fund-
ing and gradual liquidation of the war debt.
It is becoming more and more apparent that
the gradual restoration of business and in-

TREASURY POLICIES 47

dustry in Europe will come not only through
the maintenance of sound financial conditions
in this country but also in the gradual adop-
tion of similar principles by the governments
of Europe, many of which still persist in
policies of budgetary deficits and currency
inflation.

CHAPTER III
KEVISING THE TAXES

CHAPTER III

REVISING THB TAiBS

A OOEOLLABY of Hamilton's policy of keep-
ing the Government's expenditures within
its income is the further policy of keeping
the revenues not too greatly in excess of ex-
penditures. It was in accordance with this
policy that the Treasury in the fall of 1923
recommended a reduction of the taxes.

Theories of taxation are more interesting
and more intelligible when applied to actual
conditions for, in the conduct of government,
as every responsible official sooner or later
finds out, one is more often confronted with
a condition than with a theory. It will be
worth while, therefore, to review the recom-
mendations made by the Treasury in connec-
tion with conditions existing at the end of
the fiscal year 1923.

The fiscal years 1922 and 1923 each closed

51

52 TAXATION: THE PEOPLE'S BUSINESS

with a surplus of about three hundred and
ten million dollars above all expenditures,
chargeable against ordinary receipts, includ-
ing the Sinking Fund and other similar re-
tirements of the debt. This surplus, of
course, was not, as many seemed to think, a
deposit of cash in bank, available for imme-
diate expenditure. The public debt at the
close of the fiscal year 1923 was about
twenty-two billion dollars, and of this amount
one billion dollars was in short-time certifi-
cates, having a maturity of less than a year ;
and four billion dollars was in notes matur-
ing within four years. On each of the four
quarterly tax payment dates the Government
issues its Treasury Certificates to keep sta-
ble the money market during tax payments
and to give the Government sufficient funds
with which to operate until the next payment.
In other words, at least four times a year the
Government borrows money and pays it back
out of tax receipts. An excess, therefore, of
receipts, over expenditures for any three
months' period simply results in smaller bor-

REVISING THE TAXES 53

rowing for the next period, and does not re-
sult in an accumulation of cash. It is an
automatic reduction of the debt. The Gov-
ernment operates in the same manner as
does a business man who is heavily in debt
to the bank. The latter merely renews his
paper for lesser amounts each ninety days
as he accumulates funds with which to pay
off his notes.

In the case of the Government, therefore,
every new expenditure must be paid out of
new borrowings. The Sinking Fund, which
is part of the Budget of regular govern-
mental expenditures, reduces the debt by
about three hundred million dollars a year,
and the British repayments and other less
important items bring the amount of debt
reduction annually to about half a billion
dollars. These repayments will eliminate
the debt within a reasonable period ; and the
Treasury felt that the desirability of fur-
ther debt reduction out of surplus receipts
was not so great as a lessening of the tax
burden. Based upon these premises, what

54 TAXATION: THE PEOPLE'S BUSINESS

was known as the Mellon Plan of tax reduc-
tion was worked out.

In view not only of the surplus but of the
heavy and, unscientific tax rates in force at
the close of the fiscal year 1923, the Treas-
ury felt that the fortunate condition of the
finances offered an opportunity not merely
to reduce the taxes but to revise the system
in accordance with sound principles of taxa-
tion. In a letter which I wrote on November
10, 1923, to Honorable William B. Green,
Acting Chairman of the Committee on Ways
and Means of the House of Representatives *
I recommended that the tax system be re-
vised substantially as follows:

(1) By allowing a 25% reduction in the
tax on earned income;

(2) By reducing the normal tax rates
from 4% to 3% and from 8% to 6% ;

(3) By reducing the surtax rates by com-
mencing their application at $10,000 instead
of $6,000, and scaling them progressively
upwards to 25 % at $100,000;

1 (See Appendix A.)

REVISING THE TAXES

55

(4) By repealing the telegraph and ad-
mission taxes and certain small miscellane-
ous taxes;

(5) By making certain changes in the reve-
nue laws in the interest of simplicity and
clarity, eliminating methods of tax avoid-
ance and providing a more satisfactory
method of determining tax liability.

The provision of widest general interest,
because it affected everyone, was the pro-
posed reduction of the normal tax rates.
The following table shows the saving to tax-
payers in the lower brackets under the rates
proposed :

INCOME TAX PAYABLE UPON CERTAIN EARNED NET INCOMES

SINGLE PERSON

HEAD or FAMILY WITH
DxpxifDxirr CHILDBBN

NOT INOOM»

Present law

Proposed

Present law

Proposed.

$1,000

$0.00

$0.00

$0.00

$0.00

2,000

40.00

22.50

0.00

0.00

3,000

80.00

45.00

0.00

0.00

4,000

120.00

67.50

28.00

15.75

5,000

160.00

90.00

68.00

38.25

6,000

240.00

135.00

128.00

72.00

7,000

380.00

180.00

186.00

99.00

8,000

420.00

225.00

276.00

144.00

9,000

510.00

270.00

366.00

189.00

10,000

600.00

315.00

456.00

234.00

56 TAXATION: THE PEOPLE'S BUSINESS

The Treasury actuaries estimated that
under the proposed rates the Government
would sustain a loss in revenue and the tax-
payers a saving of about ninety-two million
dollars in the brackets under $6,000, and
fifty-two million dollars in the brackets from
$6,000 to $10,000, or a total saving of one
hundred and forty-four million dollars in the
brackets under $10,000 a year. About 70%
of the loss in revenue to the Government
would come from the brackets under $10,000
and only 2y%% of the loss in revenue would
come from the brackets of income in excess
of $100,000 a year. It was estimated that
even this 2^% l°ss would be more than
made up in the second year of the operation
of the law.

The provision of next widest general in-
terest was the recommendation for a reduc-
tion of 25% in the tax on earned income as
compared with that paid upon incomes de-
rived from business or investments. The
fairness of taxing more lightly incomes from
wages, salaries and professional services

REVISING THE TAXES 57

than the incomes from business or from in-
vestments is beyond question. In the first
case, the income is uncertain and limited in
duration; sickness or death destroys it and
old age diminishes it. In the other, the
source of the income continues; the income
may be disposed of during a man's life and
it descends to his heirs.

Surely we can afford to make a distinction
between the people whose only capital is
their mental and physical energy, and the
people whose income is derived from invest-
ments. Such a distinction would mean much
to millions of American workers and would
be an added inspiration to the man who
must provide a competence during his few
productive years to care for himself and his
family when his earning capacity is at an
end.

All income under $5,000 should be con-
sidered earned income. Under such a con-
struction, substantial justice would be done
and the administration of the law would be
simplified. There is, of course, absolutely

58 TAXATION: THE PEOPLE'S BUSINESS

no reason for placing a limitation of $20,000
or any other sum on earned income. If the
distinction between unearned income and
earned income is good, it is good in every
bracket. One man can earn $20,000 a year
just as surely as another can earn $5,000.
If the tax on unearned incomes in excess of
$20,000 is at the proper rate, then the same
rate is too high for earned incomes.

The third outstanding feature of the
Treasury's recommendations was the pro-
posal for a revision of the surtaxes. As this
was practically the only recommendation on
which a very great division of opinion arose,
I shall leave it for consideration in a later
chapter.

Another recommendation was that the de-
ductions for capital losses should be limited
to I2y2% of the loss. Capital assets may be
defined as property held by the taxpayer for
profit or investment for more than two years.
The present revenue law limits the tax on
capital gains to 12% % but puts no limit on
the deductions for capital losses. I believe

REVISING THE TAXES 59

that it would be sounder taxation policy gen-
erally not to recognize either capital gain
or capital loss for purposes of income tax.
This is the policy adopted in practically all
other countries having income tax laws, but
it has not been the policy in the United
States.

In all probability, more revenue has been
lost to the Government by permitting the
deduction of capital losses than has been
realized by including capital gains as in-
come. So long, however, as our law recog-
nizes capital gains and capital losses for
income tax purposes, gain and loss should
be placed upon the same basis, and the pro-
vision of the 1921 Act taxing capital gains
at I2y2% should be extended to capital
losses, so that the amount by which the tax
may be reduced on account of capital loss
will not exceed 12y2% of the loss. It is esti-
mated that such a provision in the law would
increase the revenues by about twenty-five
million dollars.

Deductions from gross income for interest

60 TAXATION: THE PEOPLE'S BUSINESS

paid during the year and for losses not of a
business character should be limited to the
amount the sum of these items exceeds the
tax-exempt income of the taxpayer. The
1921 Act provides that interest on indebted-
ness to acquire or carry tax-exempt securi-
ties is not deductible. This provision is in-
effective because a taxpayer may purchase
tax-exempt securities for cash and borrow
money for other purposes. So long as a tax-
payer has income which is not reached for
taxation, he should not be permitted to de-
duct his non-business losses from the income
which is taxable, but should be restricted in
the first instance to a deduction of these
losses on his non-taxable income. The esti-
mated increase of revenue from this source
is thirty-five million dollars.

In some States the income of the husband
is the joint income of the husband and wife,
and each, therefore, is permitted to file a re-
turn for one-half of the income. This gives
an unfair advantage to the citizens of those
States over the citizens of the other States

REVISING THE TAXES 61

of this country, and, to correct this in-
equality, it was recommended that the Fed-
eral Government tax community property
income to the spouse having control of the
income. It was estimated that such a pro-
vision in the law would increase the revenues
by about eight million dollars.

A recommendation was also made that the
tax on telegrams, telephones and leased
wires should be repealed. This is the last
remaining of the transportation taxes estab-
lished during the war. It is a source of in-
convenience to every person using the tele-
phone or telegraph, and should now be elimi-
nated from the tax system. The Treasury
estimated that the repeal of this tax would
mean a loss in revenue of about thirty million
dollars a year.

Another war tax which should be repealed
is the tax on admissions. The greater part
of this revenue is derived from the admis-
sions charged by neighborhood moving pic-
ture theatres. The tax is, therefore, paid by
the great bulk of the people whose main

62 TAXATION: THE PEOPLE'S BUSINESS

source &i recreation is attending the movies
in the neighborhood of their homes. The
loss in revenue would be about seventy mil-
lion dollars, but it would constitute a direct
saving to a large number of people whose
tax burden should be lightened wherever it is
possible to do so.

The Treasury also suggested to Congress
the possibility of eliminating various small
miscellaneous taxes which have an inconsid-
erable bearing on the general revenue of the
Government and are a source of inconven-
ience to taxpayers as well as difficult to col-
lect. These changes are in line with the the-
ory that taxation should be simplified and
made effective for bringing in revenue with-
out constantly annoying and irritating the
taxpayer. In carrying out this theory, it is
highly important, of course, that the reve-
nue laws should be strengthened by elimi-
nating methods heretofore used by taxpayers
to avoid payment of taxes.

Every effort should be made to simplify
administration of the laws and to permit a

REVISING THE TAXES 68

prompt determination of liability in a man-
ner more satisfactory to the taxpayer. As
one step toward this end, the Treasury rec-
ommended the establishment of a Board of
Tax Appeals in the Treasury but independ-
ent of the Bureau of Internal Revenue, to
hear and determine cases involving the as-
sessment of internal revenue taxes., The
Board would sit locally in the various ju-
dicial circuits throughout the country. This
would give an independent administrative
tribunal equipped to hear both sides of the
controversy, which would sit on appeals
from the Bureau of Internal Revenue and
make decisions which would be conclusive on
both the Bureau and the taxpayer on the
question of assessment. The taxpayer, in
the event that decision should be against him,
would have to pay the tax according to the
assessment and have recourse to the courts,
while the Government, in case decision
should be against it, would likewise be
obliged to have recourse to the courts, in
order to enforce the collection of the tax. In

64 TAXATION: THE PEOPLE'S BUSINESS

a hearing in the courts, the findings of the
Board should be taken as prima facie evi-
dence of the facts contained therein.

In other nations having income tax laws,
privacy of returns is respected. In every
State in the United States, with one excep-
tion, privacy of returns is guaranteed by
law. That exception is Wisconsin, where
the privacy provision of the act has been re-
pealed, but the validity of the law has been
attacked successfully in the lower courts and
final decision has not yet been received from
the Supreme Court. As regards the Federal
law, it would not be objectionable if the
privacy of returns be removed so far as cer-
tain committees of Congress are concerned,
provided that the returns are submitted to
the committees only in executive session and
mention of the returns on the floor of Con-
gress and the publication thereof in the Con-
gressional Record be prevented. But there
can be no privacy if the returns are dis-
cussed in open committee or on the floor of
Congress.

REVISING THE TAXES 65

It was estimated that the recommenda-
tions for changes in the tax laws, as stated
above, would have the following effect on the
Government's revenues:

DECREASE INCREASE
(in millions (in millions
of dollars) of dollars)

Reduction of 25% in tax on earned

income 97

Reduction in normal tax 92

Readjustment of surtax rates . . . 102

Capital loss limited to 12 H% 25

Interest and capital loss deductions

limited 36

Community property amendment . 8

Repeal of telegraph and telephone

tax 30

Repeal of admissions tax 70 ....

Total 391 68

68

Net Loss 323

The benefits of the reduction will be dis-
tributed among all classes of taxpayers, and
the revision generally will help to free busi-
ness and industry of vexatious interference
and encourage in all lines a more healthy
development of productive enterprise.

CHAPTER IV

SURTAXES

CHAPTER IV

SURTAXES

THE surtax is the outgrowth of war con-
ditions. It is based on the theory that the
man of large income should pay more pro-
portionately than the smaller taxpayer. If
A has twice as much income as B, then A
pays not twice but three or four times as
much tax. It is a progressively increasing
tax, which ranges from \% to 50%, begin-
ning at incomes of $6,000 a year. As an
example of how the surtax operates, a man
with an income of $1,000,000 has the same
aggregate income as 200 men each with in-
comes of $5,000, but the 200 small incomes
pay a tax of $38.25 each or an aggregate tax
of $7,650, whereas the millionaire under the
Treasury's recommendations will pay a tax
of $298,792. The one large income pays 40
times the tax paid by the 200 smaller incomes

69

70 TAXATION: THE PEOPLE'S BUSINESS

of equal aggregate amount, or the same
amount of tax as 7,800 men with an in-
come of $5,000 each or a total income of
$39,000,000.

In addition to the surtax, of course, the
same taxpayers pay the normal tax of 4:%
on the first $4,000 of their incomes and an
additional 8% on all income in excess of that
amount, so that the very large incomes are
taxed as much as 58%. If A, for instance,
has an income of $6,000, his tax is $240,
whereas B, with an income of $12,000, is
taxed $240 on the first $6,000 and $560 on
the second $6,000, making a total tax of
$800, or more than three times the tax levied
on A.

Under the Treasury's recommendations it
was proposed that the surtax should be re-
vised, making the application of the surtax
begin with incomes of $10,000 instead of
$6,000, and increasing progressively up-
wards to 25% on all incomes of $100,000 and
over. Incomes under $10,000 would pay no
surtax at all; incomes over $100,000 would

SURTAXES 71

pay the maximum of 25%, plus the normal
tax.

To the average man, it seems not unfair
that the taxpayer with an income of over
$200,000 a year should pay over half of it to
the Government. It is a well-known fact
that most people of great wealth use a com-
paratively small amount of their incomes for
their own and their families' personal physi-
cal needs. Taxation, however, is not a
means of confiscating wealth but of raising
necessary revenues for the Government.

One of the foundations of our American
civilization is equality of opportunity, which
presupposes the right of each man to enjoy
the fruits of his labor after contributing his
fair share to the support of the Government,
which protects him and his property. But
that is a very different matter from confis-
cating a part of his wealth, not because the
country requires it for the prosecution of a
war or some other purpose, but because he
seems to have more money than he needs.
Our civilization, after all, is based on accum-

72 TAXATION: THE PEOPLE'S BUSINESS

ulated capital, and that capital is no less
vital to our prosperity than is the extraordi-
nary energy which has built up in this coun-
try the greatest material civilization the
world has ever seen. Any policy that delib-
erately destroys that accumulated capital
under the spur of no necessity is striking
directly at the soundness of our financial
structure and is full of menace for the
future.

In time of war or great public necessity,
unusual tax measures can always be justi-
fied. During the World War, surtaxes were
evolved to meet the extraordinary commit-
ments necessary for the successful prosecu-
tion of the war. For a time the surtax rates
produced a large income, but since the close
of the war, their productivity has steadily
declined and the man of large income has
tended more and more to invest his capital
in such a way that the tax collector cannot
reach it.

This is clearly shown by the statistics for
the six-year period extending from 1916 to

SURTAXES 73

1921. The preparation of income statistics
is a matter of considerable time and labor
and cannot be done until all returns from
the collectors can be assembled, examined
and tabulated. The statistics of 1921 re-
turns were completed in October, 1923, and
are the latest figures available. The force
of these statistics, as may be seen from the
table on page 74, is most compelling.

This table contains the total net incomes
reported from all classes as well as the net
incomes of those in the $300,000 class. For
the full six-year period (1916-1921) shown
in the table, it will be noticed that the total
net incomes returned for taxation have in-
creased from $6,298,000,000 to $19,577,000,-
000, whereas incomes in the $300,000 class
have decreased from nearly $1,000,000,000 in
1916 to $153,000,000 in 1921, and the number
of taxpayers in that class has fallen from
1,296 to 246. Again referring to the same
table, it will be noted that dividends and tax-
able interest on investments have increased
during the period from $3,200,000,000 to

74 TAXATION: THE PEOPLE'S BUSINESS

,§
o

I

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•I

5

go e* tH

CO Oi CO

COCOOOO5IOIO

oo»coooooo

O> r-< OO 1O »O CO

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SUETAXES

75

$4,160,000,000, whereas dividends and taxable
interest on investments of the $300,000 class
of taxpayers have decreased from $706,000,-
000 to $155,000,000. The table further dis-
closes that whereas the year 1920 shows a
peak in total net incomes and total dividends
and taxable interest on investments, it made
no halt in the progressive diminution in the
number of taxpayers with incomes in the
$300,000 class, in their total net incomes, or
in their incomes from dividends and taxable
interest on investments.

YBAB

TOTAL SUBTAX

SURTAX ON INCOME
IN EXCESS ov
$300,000

PERCENTAGE OF
TOTAL OP THOSE
IN EXCESS OF
$300,000

1916 »

$121,946,136

$81,404,194

66.8

1917

433,345,732

201,937,975

46.5

1918

651,289,027

220,218,131

33.8

1919

801,525,303

243,601,410

30.4

1920

596,803,767

134,709,112

22.6

1921

411,327,684

84,797,344

20.6

1 1016 was a year of low surtax rates.

The above table shows the amount of
surtax returned on account of incomes in
excess of $300,000 for the six-year period,

76 TAXATION: THE PEOPLE'S BUSINESS

together with the total surtax returned and
the percentage the surtax on incomes in ex-
cess of $300,000 was in relation to the total
surtax.

From this it is clearly seen that, whereas
the total surtax has varied, the percentage
of surtax paid by the $300,000 class has pro-
gressively decreased from 66.8 % to 20.6%,
without a break for any prosperous year.
We have, therefore, for the six years of
varying degrees of prosperity, statistics
showing a marked and continuous tend-
ency.

In view of the increase in net income of
the country from 1916 to 1921, as shown by
the above statistics, it can hardly be con-
tended that there were fewer men of large
wealth in the country in 1916 than in 1921.
The question is, therefore, where did the
income of these men go, since it was not re-
ported for taxation!

There is no doubt of the fact that much of
it went into tax-exempt securities. There
are over $12,000,000,000 of wholly tax-ex-

SURTAXES 77

empt securities outstanding, and the loss of
revenue to the Government over what it
would receive if the income were taxable is
estimated at over $200,000,000 a year, and
the loss of revenue over a similar investment
in productive business at over $400,000,000
a year. In the 1921 Eevenue Act the Con-
gress removed the requirement that tax-
exempt income be reported. The extent to
which people of wealth have had resort to
this means of avoidance is not available to
the Government except in returns for in-
heritance tax purposes.

It has been contended in correspondence
addressed to me that tax-exempt securities
are not attractive as compared with bank
stocks and industrials which yield from 10
to 100% on their investment. Such a state-
ment, of course, is misleading if the basis is
made the amount originally invested. The
proper basis is the market value of the secur-
ities. The question is, can a taxpayer get
more return after income taxes out of $1,000
worth of tax-exempt securities or out of

78 TAXATION: THE PEOPLE'S BUSINESS

$1,000 worth of some taxable investment? I
know of no sound bank stock which yields
as high as 10% on what it can be sold for
and the proceeds put in tax-exempt secur-
ities, nor do I know any sound investments
which run up to 100% on the market value
of the stock. It is true that speculation
sometimes gives these high returns, but it
is the very demand for such returns on ac-
count of the high surtaxes that has kept
capital out of ordinary productive business
and attracted it only to such projects as give
opportunity for undue profit.

Standard Oil stocks in 1923 have been cited
as an example of investments which would
be made in preference to tax-exempt secur-
ities. This argument is most appropriately
answered by the return of the estate of Mr.
William Rockefeller, who was doubtless fa-
miliar with the possibilities of the Standard
Oil companies. The total market value of
his investments in those stocks was less than
$7,000,000, whereas the value of his wholly
tax-exempt bonds was over $44,000,000 or six

SURTAXES 79

times the amount he held in the four Stand-
ard Oil companies.

Many men of great wealth in this country
have put some or all of their fortunes into
tax-exempt securities. In tho cases of these
men, high surtaxes are becoming less and
less productive of revenue; and in many
cases they have become barren. It is in-
credible that a system of taxation which per-
mits a man with an income of $1,000,000 a
year to pay not one cent to the support of
his Government should remain unaltered.

What is the remedy? It is time to face the
facts and to recognize that merely levying
high surtaxes will not halt the flight of cap-
ital away from taxable investments. Just
as labor cannot be forced to work against
its will, so it can be taken for granted that
capital will not work unless the return is
worth while. It will continue to retire into
the shelter of tax-exempt bonds, which offer
both security and immunity from the tax
collector.

Congress has refused, ;r spite of repeated

80 TAXATION: THE PEOPLE'S BUSINESS

requests by the Treasury, to submit to the
States a Constitutional amendment, taking
away the tax-exempt privilege now enjoyed
by State, county and municipal bonds. There
is consequently only one course to pursue.
It must be made more profitable for wealth
to go into taxable business than into tax-
exempt bonds.

The Treasury has accordingly recom-
mended that a maximum surtax of 25% plus
6% normal tax be imposed in lieu of the 58%
tax now levied on the largest incomes. Such
a reduction is necessaiy in order to attract
the large fortunes back into productive
enterprise.

The Treasury has been asked how this
figure was determined. The question is one
to which ordinary business experience must
give answer. If a man is manufacturing any
article of commerce, he will endeavor to fix
a price for his product at a point which will
yield a profit and at the same time stimulate
a demand for what he has to sell. If he puts
his price too low, his sales are large but his

SURTAXES 81

profits small; if he puts his price too high,
his profit for each article is large but his sales
fall off, so that his total profit again is low.
Somewhere between these extremes is the
price at which he will make the most money.
An income tax is the price which the Gov-
ernment charges for the privilege of having
taxable income. If the price is too low, the
Government's revenue is not large enough;
if the price is too high, the taxpayer, through
the many means available, avoids a taxable
income and the Government gets less out of
a high tax than it would out of a lower one.
What the proper figure is between these ex-
tremes is not detcrminable with absolute
accuracy. It is the opinion of some authori-
ties on taxation that this figure is below 15%.
None of them places it as high as 25%.
Clearly, 58% is excessive. For example, an
investor is offered a prospect of going into a
business returning 11%. He also has the
choice of buying a municipal bond paying
4%% which, to a man of large income, returns
the same net income as the 11% business.

82 TAXATION: THE PEOPLE'S BUSINESS

No business returning 11 % net is as sound as
a municipal bond. Consequently the investor
puts his money into tax-exempt securities;
the Government gets no tax and productive
business is deprived of the capital.

Everyone at all active in business is ac-
quainted with many instances where new
projects have not been consummated on ac-
count of high surtaxes. With the proposed
maximum rate of 6% normal tax plus 25%
surtax, an investment yielding 6y2% would
be the equivalent of a 4%% tax-exempt bond.
Businesses with reasonable assurance of
such a return can be found, with the specu-
lative probability of greater return. The
investor, with the chance of making more,
will go into business and reject the tax-
exempt security. As a consequence, he will
have a taxable income in which the Govern-
ment will share instead of income yielding no
revenue whatever to the Government.

An interesting illustration of this is the
situation in 1916, when, with surtax rates
running up to 13% as a maximum, the Gov-

SURTAXES 83

eminent collected from the $300,000 class
$81,000,000 in surtaxes. In 1921, with the
surtax reaching 65%, the Government col-
lected from the same class of taxpayers
$84,000,000. In other words, the Government
received substantially the same revenue from
high incomes with a 13% surtax as it re-
ceived with a 65% surtax. It is not too much
to hope that some day we may get back on a
tax basis of 10%, the old Hebrew tithe, which
was always considered a fairly heavy tax.

The analysis which the Treasury has made
of the tax situation, as well as the remedy
which it has proposed, has received the sup-
port of one of the most eminent authorities
on taxation in the country. The following ex-
tract is quoted from an open letter to the
Chairman of the Committee on Ways and
Means of the House of Representatives writ-
ten by Thomas S. Adams, Professor of Eco-
nomics at Yale University, former President
of the National Tax Association, formerly a
member of the Wisconsin State Board of Tax
Commissioners, and Tax Adviser to the

84 TAXATION: THE PEOPLE'S BUSINESS

United States Treasury Department from
1917 to 1921. After reviewing the question
of tax avoidance under the present law and
recognizing the impossibility of immediately
closing all the holes in the law, by means of
which tax payment is avoided, he makes the
following statement with reference to the
revision of the surtaxes:

"Assuming that the holes in the income
tax will not be closed in the near fu-
ture, what conclusions fairly follow with
respect to the upper surtaxes?

"I shall not insult your intelligence by
asserting that there is a precise maximum
surtax, definitely known or demonstrable,
which inevitably * follows as the day the
night' from the above premise. It is pos-
sible, for instance, that a few inexperi-
enced members of Congress may not know
of the ease with which the income tax may
be legally avoided, when high rates pro-
vide a sufficient incentive. Again, there
may be a few idealistic congressmen who
so fervently believe that the rich ought to
pay 40 to 50 per cent of their incomes,
that they would rather assert this obli-

SURTAXES 85

gation in the tax law and not collect the
tax, than vote for a 25 per cent rate, or
any other rate which can be collected.

"But the practical and experienced
congressman, if I understand his posi-
tion, does not wish to be placed in these
groups nor be judged by the standards
applicable to such groups. He is after
results and elects to be judged by the ac-
tual fruits of the legislation which he
supports. Surely such a congressman, if
the holes in the tax remain open, and he
nevertheless votes for surtaxes of 38 or
40 per cent, cannot go to his constituents
and conscientiously say : ' I have voted to
make the rich pay what they ought to pay. '
The most that he can fairly say is: 'I
have voted for the rates which the rich
ought to pay, and hope within the next
four or five years to find ways and means
of closing the holes by which most rich
men now avoid such rates. *

"The latter, I gather, is the position of
those who, knowing that the holes are open,
nevertheless vote for the rates that make
the rich utilize these holes. They propose
'to narrow some of these holes at this ses-
sion of Congress and close more of them

86 TAXATION: THE PEOPLE'S BUSINESS

in the future.' I do not sneer at this po-
sition. It is one that an honest and intel-
ligent man could conceivably take. But
it overlooks and forgets one crucial fact.
It assumes that, four or five years from
now, when we get around to the task of
patching up the holes in the income tax,
we shall have the kind of income tax that
can be patched up. The probability is
strong that in four or five years the in-
come tax will, as a matter of practical

politics, be past patching.

#*##«#

"We debate and dispute about the mi-
nutiae of rates, when the question is the
honesty or integrity — and hence the real
life — of the progressive income tax.

"The income tax will not be saved by
lifting from its load a mere straw. Re-
ducing the maximum surtax from 50 to 44,
or even to 40 per cent, would in my opin-
ion be useless. It would be cutting off the
tail by inches. Taxpayers who will avoid
50 per cent surtaxes, will avoid 40 per
cent and, in my deliberate judgment, 35
per cent surtaxes. There are some occa-
sions when a half loaf is better than noth-
ing at all. This is not one of those occa-

SURTAXES 87

sions. I can see no justification in prin-
ciple for a cut in the maximum surtax of
10 or 12 per cent. There should be greater
reduction or no reduction at all. The rea-
son or justification for cutting the upper
surtaxes is not to reduce the taxes of the
few rich men who happen to be caught.
The justification is to get a tax that can
be enforced; to reduce the discrepancy
between the taxation of corporations and
the taxation of individuals; to give back
to certain lines of business whose normal
supply of credit comes from wealthy in-
dividuals, their normal and natural in-
vestment market; and most of all, to give
to the income tax at this critical period a
task which it can creditably perform.

"When revenue is needed, most Ameri-
cans (including myself) believe in levying
the highest progressive rates that can be
imposed without doing more harm than
good to the nation as a whole. But at this
moment, any rate is too high that will
retard the restoration of the income tax
to health and working efficiency. Any rate
is too high that pushes the income tax
into deeper disrepute. With the holes in
the income tax wide open, it seems to me

88 TAXATION: THE PEOPLE'S BUSINESS

that its friends should be the first to re-
sent and oppose rates which expose the
tax to contempt as a complicated night-
mare of political dreamers. We want an
effective progressive tax, not a gesture.

"If the new income tax — the income tax
of 1924 — fails to reach and actually tax
the richer taxpayers, whose fault will it
be t Who will be responsible for the fur-
ther degradation of the income tax?

"We shall not be able to blame the
rich. They escape, for the most part, by
legal avoidance, not by illegal evasion.
Few people, rich or poor, pay taxes which
they can lawfully avoid.

"We shall not be able to blame the ad-
ministration, if the tax law carries rates
which Secretary Mellon and his Demo-
cratic predecessors have said it is im-
possible to collect in times of peace. Sec-
retary Mellon will have a perfect alibi.

"But he has stated as his opinion that
a maximum surtax of 25 per cent will
reverse the tide of avoidance and permit
the income tax to be creditably, if not per-
fectly, administered. Under such circum-
stances, is it not the wisest thing for those
who genuinely care for the future welfare

SURTAXES 89

of the income tax to take Secretary Mellon
at his word? Give him the 25 per cent
maximum which he requests, and then
hold him and his administration respon-
sible for results.

"In the name of political honesty, what
difference does it make whether the maxi-
mum tax be 65 per cent, 45 per cent, or
35 per cent, if such rates will not be col-
lected in a dwindling minority of cases ? ' '

CHAPTEE V
TAXING ENERGY AND INITIATIVE

CHAPTER V
TAXING ENERGY AND INITIATIVE

IF high surtaxes were becoming merely in-
effective we might let the system stand until
the Government should be obliged to seek
other sources of revenue. But a much more
serious matter is involved. The flight of
capital into safe but unproductive forms of
investment should give us great concern, for
it indicates that high surtaxes are gradually
destroying business initiative.

The existing system of taxation was
framed to meet war-time conditions. But
with the passing of those conditions and the
continuance of the unscientific tax rates, the
burden is now being borne chiefly by the man
of initiative attempting to make money un-
der the usual conditions of business compe-
tition. These rates bear most heavily on the
producer, the salaried man and those en-

93

94 TAXATION: THE PEOPLE'S BUSINESS

gaged in trying to make a competence for
their later, unproductive years. They penal-
ize principally the middle incomes, while per-
mitting wealth to escape by investment in
tax-exempt securities and by other available
methods. The vital defect in our present sys-
tem is that the tax burden is borne by wealth
in the making, not by capital already in ex-
istence. We place a tax on energy and initia-
tive; and at the same time provide a refuge
in the form of tax-exempt securities, into
which wealth that has been accumulated or in-
herited can retire and defy the tax collector.
We have under the high surtaxes a system
that increases the actual tax burden on the
men of moderate incomes and allows many of
the largest incomes to escape taxation.

Initiative has always been the most valu-
able American characteristic. It was this
spirit in the early colonists which brought
them to America, not to find an easier ex-
istence, but to enjoy religious and political
freedom, as well as to better their material
condition. They faced death by savages and

TAXING ENERGY AND INITIATIVE 95

starvation in order to build up a new coun-
try. It was the same spirit of adventure
which peopled and developed the West. And
it is this same spirit extended into business
that has made America the great and pros-
perous nation she is today.

The United States is no mere happy acci-
dent. What we have has been achieved by
courage and hard work. The spirit of busi-
ness adventure has built up in this country a
civilization which offers unprecedented re-
wards to any man who is willing to work.
But where the Government takes away an
unreasonable share of his earnings, the in-
centive to work is no longer there and a
slackening of effort is the result. To share
not at all in a man's losses and to take one-
half of his gains, making him work three days
out of six for the Government, is to impose
odds too heavy to be borne. More and more
the business adventure becomes too hazard-
ous and the high spirit of initiative disap-
pears in discouragement. An economic sys-
tem which permits wealth in existence to

96 TAXATION: THE PEOPLE'S BUSINESS

escape its share in the expense of the Gov-
ernment, and wealth in creation to be penal-
ized until the creative spirit is destroyed, can-
not be the right system for America.

Henry Ford is one of the outstanding ex-
amples of what American initiative has ac-
complished in the last twenty years. Under
the conditions which then obtained in this
country, he has built up one of the great in-
dustrial establishments of the world, giving
employment to thousands and adding to the
comfort of millions of individuals by placing
within their reach an automobile of moderate
cost. In a recent interview he told why such
an accomplishment would have been impos-
sible under the present high surtaxes.

Starting out with a small capital, he put
his profits back into the business and these
in turn were used to buy better machinery,
thus making it possible to reduce the price of
his cars. If the present tax rates had been
in force, most of these profits would have
been paid to the Government and Mr. Ford
doubts that it would have been possible ever

TAXING ENERGY AND INITIATIVE 97

to reach a point where he could have pro-
duced a car under $1500. Mr. Ford added:

"High taxes on the rich do not take
burdens off the poor. They put burdens
on the poor. As far as our company is
concerned, we can go on about as we now
are, whether the surtax be 25% or 50%.
We can make some improvements, but we
cannot do the great things we should do
had we more money. We cannot make
such progress in the next fifteen years as
we have in the last fifteen, and all other
forward-looking companies will be in ex-
actly the same boat."

Mr. Eichard Olney, formerly a member of
Congress and now engaged in the wool busi-
ness in Boston, had the following to say
about the surtaxes :

"As a member of a firm of wool mer-
chants, we have a customer operating
about ten sets of woolen machinery, who,
about a year ago, made plans to enlarge
his plant fully one-half to meet an in-
creasing demand for manufactured goods,
but, consulting with his partners, he de-

98 TAXATION: THE PEOPLE'S BUSINESS

cided on account of the high surtaxes to
invest the surplus balance in profits from
the firm in non-taxable securities. In
other words, he resented the penalty im-
posed by the Government upon thrift
through a severely high surtax and in-
vested his surplus balance in profits where
he would receive a fair income involving
no great risk and anxiety/7

Another interesting bit of testimony in con-
nection with still another great industry was
contained in a letter received by the Treas-
ury from Mr. Daniel Guggenheim. Mr. Gug-
genheim said :

"Up to a few years ago our operations
were upon a progressively increasing
scale; at the present time they are upon
a greatly reduced scale, and the reason is
because of the unduly high surtaxes upon
incomes. The net result is a great decline
in our ability to do that which we would
like to do in the promotion of American
enterprise, business activity and pros-
perity.

"Until recent years it was not uncom-
mon for us directly through our firm or

TAXING ENERGY AND INITIATIVE 99

through corporations created for that pur-
pose, to spend fully $500,000 each year in
the mere examination of mining proper-
ties. Today our expenses in that direc-
tion are practically nil, and the large or-
ganization which we had built up, for that
purpose, has been virtually dissolved.

4 * Under the present plan of taxation,
the business man must assume the burden
of all losses, whereas the Government
through taxes takes so large a share of
the profits that in a business such as min-
ing, involving great risks of loss, the pos-
sible net return — under existing law —
does not warrant taking the chances in-
volved.

"If a reduction in the surtaxes is made
in accordance with your proposals, there
is no doubt that I will personally be re-
lieved from certain taxation. But that
fact will not add to my personal comfort
or expenditure; it will merely enable me
to make a further investment in profitable
enterprise, the profits from which will in
turn be subject to taxation. A change in
the plan of taxation, under which those
who earn substantial profits may retain a
sufficient share of them to compensate for

100 TAXATION: THE PEOPLE'S BUSINESS

possible losses, will very decidedly affect
the vigor of not alone our own but all
American business effort. ' 9

One of the most interesting letters received
by the Treasury was written to a senator by
a woman engaged in the dressmaking busi-
ness. The following extract is quoted from
the letter:

' 'This is a woman's endorsement of
Secretary Mellon 7s plan for reducing
Federal taxes, and I want to give you my
reasons as briefly as possible.

"For ten years I have been engaged in
the business of designing, making and
selling embroidered dresses and dress pat-
terns.

"This business gives employment to
several hundred women in Kentucky and
in other States. Aside from the executive
and clerical staff, workers are employed
as designers, as embroiderers and some as
canvassers.

"They are thus enabled to live in their
own homes — largely in the country dis-
tricts, to develop their special talents in
congenial and profitable employment, to

TAXING ENERGY AND INITIATIVE 101

supplement the family income, and in
many instances to support and educate
their families and to lay aside something
for a rainy day.

"The success of this business is a vital
thing for these employes — quite as much
so as for me. Its success depends, of
course, upon ourselves, but also upon our
ability to sell our dresses.

"Ability to sell depends upon ability of
our customers to buy, and this, in turn,
upon their chance to reduce expenses and
effect those small economies by which
women save in order that they may secure
for themselves the things that beautify
and brighten life.

"Now the object of this letter is simply
to put our story before you — to tell you
of the great burden upon our business.
This burden comes, not merely in direct
taxes, but even more in limiting the pur-
chasing powers of those who would buy
from us if they could, but who cannot
buy if they in turn are stripped by taxa-
tion.

* ' Thus industry lags and our own work-
ers lack employment and hands are idle
whose deft fingers might make beautiful

102 TAXATION: THE PEOPLE'S BUSINESS

things that capable women in turn could
sell if only customers could buy.

"I cannot estimate this direct loss of
business, due to the burdens of taxation,
nor can I appraise the evils accruing to
the Government itself from piling up
taxes that are more than its necessary ex-
penses. An obvious result is a demand
for a distribution of such accumulation.
There will always be classes in the com-
munity insisting that the Government
owes them something. Few of them will
profit by any donation that may be made
by the Government, which, after all, takes
from the producing class what it gives in
so-called bounty.

"I am a woman. My business associ-
ates are women. "We have built up our
business from nothing, without special
benefits from legislation or taxation. We
do not want any, but we do want a chance
to make our own way unhampered by ex-
cessive tax burdens.

"For the years 1919, 1920 and 1921, the
annual burden of Federal taxes upon our
combined efforts was an average of 42 per
cent of the net income of our business.
Our customers felt the pinch of taxation

TAXING ENEKGY AND INITIATIVE 103

in the same way, if not to the same
extent.

"As a result, in 1922 we had no profits,
and the government no taxes from our
business. It is the old story of killing the
goose that laid golden eggs.

"I am sure that, if you could see this
subject through the eyes of women in busi-
ness, you would realize the absolute neces-
sity of giving some relief.9'

These letters give convincing testimony of
the effect of the high surtaxes upon four im-
portant, unrelated industries. Similar testi-
mony could be cited of other trades and in-
dustries affected in like manner.

The flow of capital into tax-exempt se-
curities has been felt particularly in two
other businesses of great importance to the
general public. It is estimated that the rail-
roads will require a billion dollars a year
of new capital in order satisfactorily to pro-
vide the facilities and equipment requisite to
handle the traffic presented and to reduce
the cost of transportation. In earlier years

104 TAXATION: THE PEOPLE'S BUSINESS

the railroads have been able to maintain a
reasonable proportion between their total
stock issues and their total interest obliga-
tions. As illustrative of this, the percent-
ages of new bond issues to new stock issues
in the three years 1911, 1912, 1913, were
respectively 59 per cent, 60 per cent, and
53 per cent. In the last three years, under
high surtaxes, these percentages have be-
come 100 per cent, 95 per cent, and 94 per
cent. The time is rapidly approaching when
the railroads will be unable to issue further
bonds without substantial increase in the
stock investment. Originally railroad stocks
have been purchased and held by wealthy
men and the bonds have more generally gone
into the hands of the smaller investor. The
Supreme Court has recently sustained the
validity of the " recapture clause/' which
effectually prevents any new stock being sold
at a price which would give a man with large
income an adequate return on his investment.
If the railroads are to be furnished with
capital, much of it must come from the sale

TAXING ENERGY AND INITIATIVE 105

of stock and to permit any sale surtaxes
must be so reduced as to attract the large
investor to that type of security. Under the
present surtaxes a 6% stock nets a man of
small income 6%. It nets the man of large
wealth but 3%. The correction of this situa-
tion obviously lies in a lowering of surtaxes.
There is still an acute shortage of housing
facilities in the large cities of this country.
While it is true that the high cost of ma-
terial and labor has contributed to this
shortage, the real reason why capital has
not been more attracted to this investment
is the surtaxes. If a flat building could be
built in 1913 on a $100,000 investment, and
the investor desired 8 per cent return, his
rents had to be adjusted so as to give him
net $8,000. If in 1923 a similar building
should require $200,000, the investor, to get
the same return after high surtaxes, would
need net rents of $38,000. He would prob-
ably, however, wish to provide against this
abnormal cost of building by amortizing the
excess cost and demand net rents of $48,000.

106 TAXATION: THE PEOPLE'S BUSINESS

We have either the failure to make invest-
ment because of the unlikelihood of adequate
return, or a gouging of the tenants.

It does not change the situation if the
building operation is done through a cor-
poration. The individual investor in the
corporation is interested in what he receives.
The interposition of a corporate entity be-
tween the rents of the tenant and the profits
to the investor, taking into account the capi-
tal stock tax of the corporation, means sub-
stantially the same outgo for taxes to the
Government. Rents must be even higher
than in the case of individual investors.

It would seem necessary to reduce the sur-
taxes, not only as a means of saving the pro-
ductivity of the system, but also on account
of the far-reaching effect which such a reduc-
tion would have on the country's continued
development. It is a strange theory of taxa-
tion which, in order to make the gesture of
taxing the rich, retains rates that are pro-
ducing less and less revenue each year and
at the same time discouraging industry and

TAXING ENERGY AND INITIATIVE 107

threatening the country's future prosperity.
It is true that many existing industries are
prospering and that the country's condition
today is sound. But new investments are
not being made in sufficient number and new
enterprises are starting out under a disad-
vantage as compared with old established
ones. No useful purpose will be served by
pretending to reduce the surtaxes. In order
to have any economic effect at all, they must
be cut far enough to free capital for new
enterprises. In other words, wo must return
again to an economically sound basis of
taxation.

OHAPTEE VI

ESTATE TAXES

CHAPTER VI
ESTATE TAXES

A DISPOSITION has been manifested recently
in Congress to increase inheritance taxes
from the present maximum of 25% to a
maximum of 40%. Such legislation would
be most unwise from every point of view.

In the first place, the right of the Federal
Government to tax inheritances is based
upon no specific Constitutional power, but
upon the theory of an excise tax. These
taxes have been used heretofore only to ob-
tain additional revenue in time of war and
should be preserved for such use in the
future.

They have been levied four times in the
country's history, and may be known as the
Revolutionary War Tax, enacted in 1797
and repealed in 1802; the Civil War Tax,
enacted in 1862 and repealed in 1870; the
ill

112 TAXATION: THE PEOPLE'S BUSINESS

Spanish War Tax, which remained on the
statute books from 1898 to 1902; and the
present Inheritance Tax, which was enacted
in 1916 and subsequently amended. The
rates now reach a maximum of 25% in ad-
dition to the heavy estate taxes imposed by
the various States in which the decedents'
property is located. While the States should
do their share in the reduction of these
taxes, the Federal tax is very heavy and
should be lightened, not increased, if the
ultimate good of the country is to be taken
into consideration.

Inheritance taxes are properly sources of
revenue for the States. They are a mate-
rial element in a State budget; they are a
comparatively small element in the Federal
budget. The whole return which the Fed-
eral Government receives from estate taxes,
amounting to about $110,000,000 under pres-
ent rates, is insignificant in comparison with
the general receipts of the Government. To
deprive the States of this source of revenue,
properly their own, is to compel them to

ESTATE TAXES 113

increase taxes and to resort still further to
their principal source of income, which con-
sists in levies on land.

It is difficult to understand the attitude of
a man who opposes the adoption of a Con-
stitutional amendment taking away the tax-
exempt privilege of State and municipal
securities because he feels it would be an
invasion of "States rights, " and yet advo-
cates the permanent levy by the Federal Gov-
ernment of higher and higher estate taxes,
which are essentially taxes to be levied by the
States, rather than the Federal Government.
In advocating lower estate taxes and a re-
striction of tax-exempt securities, the Treas-
ury has been actuated in both cases by a
desire to save the productivity of the reve-
nues, which is seriously threatened under the
existing system of taxation. In the case of
tax-exempt securities, the States would give
up no right by the adoption of the amend-
ment but would merely cease to profit at the
expense of the Federal Government. In the
case of estate taxes, on the other hand, the

114 TAXATION: THE PEOPLE'S BUSINESS

States have certain definite rights which
should never be invaded by the Federal
Government, except in times of great neces-
sity, as, for instance, in the conduct of wars.

The character of taxation should not be
such as to destroy the very source from
which revenue is to flow. Almost every State
in the Union has an estate or inheritance
tax, and every estate pays, therefore, not
only the Federal tax but the tax of the State
of the residence of the decedent, plus, under
the present modern system of investment,
the taxes of one or more other States. The
total tax — always two taxes and often three
or four, may take more than half of a large
estate, and cases are possible where it would
take practically the entire property. The
situation here is even worse than in Eng-
land, where there is but one tax. Here there
are several.

The table on page 115 shows at a glance the
estate, inheritance or legacy taxes imposed
by the various States in addition to the estate
taxes imposed by the Federal Government.

ESTATE TAXES

115

STA

EXEMPTION

RATES

Alabama

None

Alaska

$100-110,000 . . .

1-17|

Arizona

100- 10,000 . . .

1-25

Arkansas . . . .

500- 3,000 i. . .

1-40

California

500- 24,000 . . .

1-20

Colorado

0- 20,000 . . .

0-16

Connecticut

500- 10,000 . . .

1- 8

Delaware

0- 3,000 . . .

1- 8

District of Columbia ....

None

Florida

None

Georgia

0- 5,000 . . .

1-21

Hawaii

500- 5,000 . . .

0-10

Idaho

500- 10,000 2. . .

1-15

Illinois

100- 20,000 . . .

2-30

Indiana

100- 15,000 . . .

1-20

Iowa

0- 15,000 8. . .

0-20

Kansas

0- 75,000 . . .

$— 15

Kentucky

500- 10,000 . . .

1-15

Louisiana

500- 5,000 . . .

0-10

Maine

500- 10,000 . . .

1- 7

Maryland

0-whole estate .

5

Massachusetts

1,000- 10,000 . . .

1-12

Michigan

100- 5,000 4. . .

1-25

Minnesota

100- 10,000 . . .

1-20

Mississippi . . . Estate . .

5,000 . . .

i

" Individual bene-

ficiary

500- 7,500 . . .

t-8

Missouri

0- 20,000 '. . .

1-30

Montana

0- 17,500 . . .

1-16

Nebraska

0- 10,000 . . .

1- 6

Nevada

0- 20,000 . . .

1-25

New Hampshire

0- 10,000 . . .

2-10

New Jersey

0- 5,000 . . .

1- 8

New Mexico

0- 10,000 . . .

1- 5

New York

0- 5,000 . . .

1- 8

North Carolina

0- 10,000 . . .

1- 9

North Dakota

0- 10,000 . . .

1-20

Ohio

0- 5,000*. . .

1-10

Oklahoma

500- 15,000 . . .

1-10

Oregon . . . Estate . . .

10,000 . . .

1-10

" Individual beneficiary

0- 1,000 . . .

0-25

Pennsylvania

0 . . .

2-10

Philippine Islands

pesos 0- 3,000 . . .

1-64

Porto Rico

$200- $5,000 . . .

1-12

116 TAXATION: THE PEOPLE'S BUSINESS

STATES
Rhode Island

EXEMPTION
5,000

RATBS

%
1-2*

i-8

1-14
1-20
1-10
0-20
'3- 5
1- 5
1-15
1-40
2-35
2-40
0-10

Estate .

Individual

beneficiary 1,000- 25,000

South Carolina 200- 10,000

South Dakota 100- 10,000

Tennessee 1,000- 10,000

Texas 500- 25,000

Utah 10,000

Vermont 0- 10,000

Virginia 1,000- 10,000

Washington 0- 10,000

West Virginia 0- 15,000

Wisconsin 100- 15,000

Wyoming 1,000- 10,000

1 Plus $5,000 of value of dower or curtesy.
1 Plus half the community property.
1 Plus distributive share of surviving spouse.
4 Plus an exemption of real property.

• Plus marital rights.

• Plus a widow's and children's award.

As the above table shows, all the States and
territories, except three, have recourse to
estate taxes, with the result that estates arc
taxed not alone by the Federal Government
but by one or more of the States also. The
time has arrived when some action to estab-
lish apportionment of taxing resources and
co-ordination of their application as between
the States and the Federal Government is
vitally necessary.

When a man dies, his property does not
often consist of cash or readily marketable
securities. The estate taxes must be met in

ESTATE TAXES 117

cash and not in kind. His executors must
proceed to realize this cash through sales of
the decedent's property. The effect of a
man's death is immediately to give notice to
all possible purchasers that a forced sale will
soon take place. This has the effect of drop-
ping the price at which securities can be sold
and results in bringing down not only the
value of such property and securities but
values everywhere. The ultimate effect of
this is to bring down the very values upon
which the tax is levied and ultimately to de-
stroy the productivity of the tax both to the
State and to the Federal Government.

These high rates of tax in their application
do not show, therefore, the true proportion
of the estate taken. In its practical effect, a
40 per cent rate requires for its satisfaction
50 per cent or more of the normal value of
the estate; and in cases where an estate is
burdened with considerable indebtedness, as
is usual where the decedent was engaged in
active business, the destructive effect is still
greater. Even upon investments which are

118 TAXATION: THE PEOPLE'S BUSINESS

of the most liquid and marketable character,
the effect is to an extent the same, since the
public knows that a sale must take place and
there is an immediate reaction in quoted mar-
ket values in anticipation of the liquidation.
Now values generally are built up and
maintained by operation of the credit sys-
tem. To say that a market value of a par-
ticular stock is $100 per share means only
that, if some one is willing to buy the stock
and some one else is willing to sell, a reason-
able number of shares will change hands un-
der these conditions at $100 per share. On
the other hand, if a seller is forced to dispose
of his stock, he must find a purchaser where
he can and at a price at which the purchaser
will buy, which is often much less than its real
value. Particularly is this true where the
sales have to be made in large blocks or where
the company whose stock is offered is not gen-
erally known to the public. One very wealthy
man in England has made a fortune almost
entirely out of taking advantage of this neces-
sity of executors.

ESTATE TAXES 119

If there were but a single instance of such
forced sales, the effect on the country as a
whole perhaps would not be material. When
you consider, however, that death brings into
the market in every decade a large propor-
tion of the total wealth of the country, the
cumulative effect upon prices is very serious.
The delicate credit structure upon which
these prices rest is broken down and to that
extent values which we call wealth disappear.
They are not transferred; they disintegrate.
The wealth is gone. No tax can be more il-
logical than that which is destructive of the
very values upon which the tax is based.

There is a point in the application of rate
of tax beyond which it is impossible to ex-
tract revenue and carried to this extreme the
consequences are revolutionary. For in-
stance, assuming that all inheritances, large
and small, were taxed at 40 per cent, it
would then be only two or three generations
until private ownership of property would
cease to exist. Since these taxes are used in
the current operation of the Government, the

120 TAXATION: THE PEOPLE'S BUSINESS

result would be not that the Government had
absorbed the wealth of the country, but that
the wealth had been spent and none was left.
Development of the credit structure and in-
crease in values make the high standard of
living in this country and the breaking down
of these values must necessarily reduce this
standard of living for everyone. A striking
illustration of this truth is the case of Russia.
Russia is a country of large natural resources
and had great wealth. There were compre-
hensive commercial operations, great indus-
trial productivity, and financial institutions
with large resources in all the centers of
population. The banks held commercial
paper, mortgages and other instruments of
credit based on land and varied production.
The revolutionists contemplated the seizure
of this property. They could see these values
indicating the wealth which they thought
they might take over. What happened?
When they commenced to make destructive
tax levies and seize hold of the assets of the
institutions, values disappeared and almost

ESTATE TAXES 121

all wealth with them. No one got it. It
simply became non-existent, and all that was
obtained by those who had expected to benefit
in the acquisition of this wealth was the phys-
ical gold and jewels, which had no value in
Eussia but could be exported and sold in
countries where values had not yet been de-
stroyed. When these physical things had
been disposed of, wealth entirely disappeared.
Any estate tax in that country would be a
dry source of revenue.

In degree England shows a similar ten-
dency. Since it became a nation, in England
land had represented wealth. By this is not
meant simply unproductive residences, but
land with its accompanying tenant popula-
tion. Under the high death duties, owner-
ship in land has ceased to have value and
large estates can now be purchased for less
than the cost of the improvements. In other
words, the land itself is rendered valueless
by the death duties and no longer produces
revenue.

The far-reaching economic effect of high

122 TAXATION: THE PEOPLE'S BUSINESS

inheritance taxes is not properly understood.
These taxes arc a levy upon capital. There
is no requirement in our law, as there is in
the English law, that the proceeds from es-
tate taxes shall go into capital improvements
of the Government. In other words, capital
is being destroyed for current operating ex-
penses and the cumulative effect of such de-
struction cannot fail to be harmful to the
country. Estate taxes, carried to an excess,
in no way differ from the methods of the
revolutionists in Kussia. Yet many respon-
sible statesmen in this country, for the sake
of increasing revenues by a comparatively
small amount, would raise the inheritance
tax rates and commit this country to a policy
of confiscation of wealth.

As regards a tax on gifts, this tax also is a
tax on capital, the proceeds of which do not
go into capital and, therefore, work a de-
struction of the total capital of the country.
Any annual tax on gifts is susceptible of
evasion by spreading the gifts over a period
of years. Such a tax will mean practically
nothing: bv wav of revenue to the Govern-

ESTATE TAXES 123

ment and will be extremely difficult to detect
and enforce. It has a most peculiar inci-
dence, unlike any other tax that I know of —
the one who gives pays the tax, and not the
one who receives.

In considering a revision of estate taxes,
there should be eliminated any question of
levying the tax as a means of punishing
wealth or as in some way for the social good
of our civilization. The theory upon which
this country was founded is equality of op-
portunity. So long as a man uses his abili-
ties within the bounds of the moral sense of
the community, monetary success is not a
crime, but on the contrary adds to the total
wealth of the country and to an increase in
the standard of living as a whole.

The social necessity for breaking up large
fortunes in this country does not exist.
Very wisely our forefathers declined to im-
plant in this country the principle of primo-
geniture under which the eldest son alone
inherited and kept the properties intact.
Under our American law, it is customary for
estates to be divided equally among the

124 TAXATION: THE PEOPLE'S BUSINESS

children ; and in a few generations any single
large fortune is split into many moderate
inheritances. As a usual thing, the continua-
tion of a single fortune through several gen-
erations has been proven to be impossible.
It is an often quoted saying that " there are
three generations from shirt sleeves to shirt
sleeves. ' '

To recapitulate: the estate tax furnishes
but a slight portion of the revenues to the
Federal Government but it supplies a large
and important part of the State revenues.
To destroy values from which the States re-
ceive income is to force them to resort to
higher taxes on land. The Federal Govern-
ment should keep estate taxes as a reserve in
times of national stress. All prior inheri-
tance taxes have been war taxes; and it is
only now that it is proposed to destroy this
reserve in times when revenues from other
sources are adequate and even in excess of the
Nation's needs. Such a course of action is
not only thoroughly unsound but borders on
economic suicide.

CHAPTEB VH
BENEFITS OF TAX REDUCTION

CHAPTER VII

BENEFITS OF TAX REDUCTION

TAX revision should be viewed only from
the angle of what is best for the country as
a whole. Taxes affect the entire country and
there is no reason why their revision should
ever be made a question of partisan politics.

The only controversial phase of the ques-
tion is the revision of the surtaxes and,
while there may be a difference of opinion
as between individuals, there can be no par-
tisan line-up on this question. Every
Treasury administration, Republican and
Democratic, for several years back has rec-
ommended that the surtax rates be reduced.
In every case, recommendation has been
based on the fact, which by this time is a
matter of common knowledge, that the

127

128 TAXATION: THE PEOPLE'S BUSINESS

higher rates of surtax are not productive and
in many ways actually operate to the preju-
dice of the revenues by encouraging invest-
ment in tax-exempt securities, in order to
avoid the realization of taxable income. Aa
long ago as 1919, Secretary of the Treasury
Glass stated in his annual report:

44 The upmost brackets of the surtax
have already passed the point of pro-
ductivity and the only consequence of
any further increase would be to drive
possessors of these great incomes more
and more to place their wealth in the
billions of dollars of wholly exempt se-
curities heretofore issued and still being
issued by States and municipalities, as
well as those heretofore issued by the
United States. This process not only
destroys a source of revenue to the Fed-
eral Government, but tends to withdraw
the capital of very rich men from the de-
velopment of new enterprises and place
it at the disposal of State and municipal
governments upon terms so easy to them
(the cost of exemptions from taxation
falling more heavily upon the Federal

BENEFITS OF TAX REDUCTION 129

Government) as to stimulate wasteful and
non-productive expenditure by State and
municipal governments. "

At the same time President Wilson in his
Message to Congress stated as follows :

"The Congress might well consider
whether the higher rates of income and
profits taxes can in peace times be effec-
tively productive of revenue, and whether
they may not, on the contrary, be de-
structive of business activity and produc-
tive of waste and inefficiency. There is
a point at which in peace times high rates
of income and profits taxes discourage
energy, remove the incentive to new en-
terprise, encourage extravagant expendi-
tures and produce industrial stagnation
with consequent unemployment and other
attendant evils. "

A year later Secretary of the Treasury
Houston, in his annual report for the year
1920, made even more specific recommenda-
tions about the surtaxes, stating the case in
the following terms:

130 TAXATION: THE PEOPLE'S BUSINESS

" Since the adoption of the heavy war
surtaxes in the revenue act of 1917, the
Treasury has repeatedly called attention
to the fact that these surtaxes are ex-
cessive; that they have passed the point
of maximum productivity and are rapidly
driving the wealthier taxpayers to trans-
fer their investments into the thousands
of millions of ta-T-free securities which
compete so disastrously with the indus-
trial and railroad securities upon the
ready purchase of which the development
of industry and the expansion of foreign
trade intimately depend.

"It seems idle to speculate in the ab-
stract as to whether or not a progressive
income-tax schedule rising to rates in
excess of 70 per cent is justifiable. We
are confronted with a condition, not a
theory. The fact is that such rates can-
not be successfully collected. Tax re-
turns and statistics are demonstrating
what it should require no statistical evi-
dence to prove. For the year 1916 net
income amounting to $992,972,985 was
included in the returns of taxpayers
having net income over $300,000 a year.
This aggregate fell to $731,372,153 for the

BENEFITS OP TAX REDUCTION 131

year 1917 and to $392,247,329 for the year
1918. There is little reason to believe
that the actual income of the richer tax-
payers of the country had fallen in that
interval. It is the taxable income which
has been reduced and almost certainly
through investment by the richer tax-
payers in tax-exempt properties. What-
ever one may believe, therefore, about the
abstract propriety of projecting income-
tax rates to a point above 70 per cent,
when the taxpayers affected are subject
also to State and local taxation, the fact
remains that to retain such rates in the
tux law is to cling to a shadow while re-
linquishing the substance. The effective
way to tax the rich is to adopt rates that
do not force investment in tax-exempt
securities/'

In advocating a revision of the taxes, the
Treasury has tried to secure a dispassionate
consideration of the whole subject by those
men in both parties who are best fitted by
training and experience to give the country a
sound tax system. The Under Secretary of
the Treasury, Mr. Garrard B. Winston, pub-

132 TAXATION: THE PEOPLE'S BUSINESS

licly stated the position of the Treasury in
a speech at Chicago, in which he said :

" There is no reason why the subject of
taxation cannot be approached from a
purely non-partisan viewpoint. The out-
standing feature of the Mellon plan is
the Secretary's recommendation for a re-
duction of the high surtaxes. Similar
recommendations have been made by the
last two preceding Secretaries of the
Treasury, both of whom held their offices
under a Democratic President. There is
nothing political in recommending a sound
basis of taxation. It is simply common
sense. "

President Coolidge, in his Lincoln Day ad-
dress at New York on February 12, 1924 (see
Appendix E), gave a masterly analysis of
the tax situation and urged that the existing
system be revised along the lines recom-
mended by the Treasury. The President
said:

"The first object of taxation is to secure
revenue. When the taxation of large in-
comes is approached with that in view, the

BENEFITS OF TAX REDUCTION 138

problem is to find a rate which will pro-
duce the largest returns. Experience does
not show that the higher rate produces the
larger revenue. Experience is all in the
other way. . . .

"I agree perfectly with those who wish
to relieve the small taxpayer by getting
the largest possible contribution from the
people with large incomes. But if the
rates on large incomes are so high that
they disappear, the small taxpayer will
be left to bear the entire burden. If, on
the other hand, the rates are placed where
they will produce the most revenue from
large incomes, then the small taxpayer
will be relieved. The experience of the
Treasury Department and the opinion of
the best experts place the rate which will
collect most from the people of great
wealth, thus giving the largest relief to
people of moderate wealth, at not over 25
per cent*

"A very important social and economic
question is also involved in high rates.
That is the result taxation has upon na-
tional development. Our progress in that
direction depends upon two factors — per-
sonal ability and surplus income. An ex-

134 TAXATION: THE PEOPLE'S BUSINESS

panding prosperity requires that the larg-
est possible amount of surplus income
should be invested in productive enter-
prise under the direction of the best per-
sonal ability. This will not be done if the
rewards of such action are very largely
taken away by taxation. If we had a tax
whereby on the first working day the Gov-
ernment took 5 per cent of your wages, on
the second day 10 per cent, on the third
day 20 per cent, on the fourth day 30 per
cent, on the fifth day 50 per cent, and on
the sixth day 60 per cent, how many of
you would continue to work on the last
two days of the week ? It is the same with
capital. Surplus income will go into tax-
exempt securities. It will refuse to take
the risk incidental to embarking in busi-
ness. This will raise the rate which es-
tablished business will have to pay for
new capital, and result in a marked in-
crease in the cost of living. If new capital
will not flow into competing enterprise
the present concerns tend toward monop-
oly, increasing again the prices which the
people must pay. . . .

' 1 Taken altogether, I think it is easy
enough to see that I wish to include in

BENEFITS OF TAX REDUCTION 135

the program a reduction in the high sur-
tax rates, not that small incomes may be
required to pay more and large incomes
he required to pay less, but that more
revenue may be secured from large in-
comes and taxes on small incomes may be
reduced; not because I wish to relieve the
wealthy, but because I wish to relieve the
country."

A sound revision of taxos should aid ma-
terially in reducing the cost of living. High
taxes have always meant a high price level,
for the taxes are paid, in a large measure,
by consumers all over the countiy and not
alone by persons actually giving their checks
to the Government. No thoughtful person
longer doubts that, irrespective of his income,
he pays a part of the high surtaxes in the
general high price level.

The public should clearly understand what
is involved in the effort to re-establish in
this country a sound basis of taxation. The
question is not whether two or three million
voters shall save $10 apiece in their direct
payments of taxes or $15 apiece, but whether,

136 TAXATION: THE PEOPLE'S BUSINESS

by the re-establishment of an economically
sound basis of taxation, the 110,000,000 peo-
ple in this country shall save much more than
$10 or $15 apiece in what they pay for the
necessities of life.

In addition to insisting upon a reduction of
the normal rates and a reduction of the rates
on eanied income, the high surtax rates must
be reduced to a point where capital is freed
from the killing effect of these rates upon
new investments. In many discussions of the
tax question the present tax rates, aggregat-
ing a maximum of 58%, are treated as if
they were normal rates of taxation. Any re-
duction from them, it is argued, is a great
concession to the rich. This is not true. Be-
fore the war required the taking of every
cent which could be obtained for the support
of the Government in its emergency, a surtax
rate reaching 13% on a two million dollar
income was considered high. As was pointed
out in a previous chapter, it is interesting to
note that substantially as much revenue was
realized from incomes over $300,000 under

BENEFITS OF TAX REDUCTION 137

a 13% maximum in 1916 as was realized
from the same class of taxpayers under a
65% rate in 1921. These high surtax rates
are war taxes ; and, as the war is over, such
taxation should cease. To retain such rates
as part of our permanent tax system is to
keep up, in part, the high costs of living which
everyone pays.

The adoption of a sound system of taxa-
tion will have a favorable effect in many di-
rections. It should help to solve the housing
problem, to make possible lower freight and
passenger rates by getting the railroads back
on an efficiency basis, to increase savings due
to the reduction of taxes on earned incomes
and the lower brackets and thereby to in-
crease the buying power of the earning class
and to raise its standard of living. It will
also promote industrial and business activity
by diverting into productive enterprise funds
which are now going into tax-exempt securi-
ties. This should increase the number of
jobs and at the same time advance general
prosperity.

138 TAXATION: THE PEOPLE'S BUSINESS

The fortunate condition of the Govern-
ment's finances in 1924 justifies not only a
revision but a reduction of taxes. It is pos-
sible to visualize the effect which such a re-
duction will have when it is realized that a
reduction of three hundred million dollars a
year over a twenty-year period will leave in
the pockets of the people over six billion
dollars for other purposes.

During this time, the budget will provide
for continued payments which will gradually
reduce the public debt, so that, if a sound sys-
tem of taxation is adopted and the present
policy of economy in government is con-
tinued, the country may look forward during
the present generation not only to a decrease
in the tax burden but to increased prosperity
in which everyone will share. The prosperity
of each individual is, after all, dependent
upon the prosperity of the whole country;
and anything that endangers or retards the
country's normal development also jeopard-
izes to that extent the prosperity of each in-
dividual taxpayer.

CHAPTEE VIII
TAX-EXEMPT SECUEITIES

CHAPTER VIII
TAX-EXEMPT SECURITIES

IN a letter dated April 30, 1921, to the
Chairman of the Committee on Ways and
Means of the House of Representatives, I
said:

"I suggest for the consideration of
Congress that it may also be advisable to
take action by statute or by Constitutional
amendment, where necessary, to restrict
further issues of tax-exempt securities.
It is now the policy of the Federal Gov-
ernment not to issue its own obligations
with exemptions from Federal surtaxes
and profits taxes, but States and munici-
palities are issuing fully tax-exempt se-
curities in great volume. It is estimated
that there are outstanding, perhaps, ten
billion dollars of fully tax-exempt secur-
ities. The existence of this mass of
exempt securities constitutes an economic

141

142 TAXATION: THE PEOPLE'S BUSINESS

evil of the first magnitude. The continued
issue of tax-exempt securities encourages
the growth of public indebtedness and
tends to divert capital from productive
enterprise. Even though the exemptions
of outstanding securities cannot be dis-
turbed, it is important that future issues
be controlled or prohibited by mutual
consent of the State and Federal Govern-
ments."

Subsequently, the following resolution was
introduced in the House of Representatives :

(H. J. Res. 314, 67th Congress,
4th Session)

JOINT RESOLUTION Proposing an amend-
ment to the Constitution of the United
States.

Resolved by the Senate and House of
Representatives of the United States of
America in Congress assembled (two-
thirds of each House concurring therein),
That the following article is proposed as
an amendment to the Constitution of the
United States, which shall be valid to all
intents and purposes as part of the Con-

TAX-EXEMPT SECURITIES 143

stitution when ratified by the legislatures
of three-fourths of the several States :

"Article — .

"Section 1. The United States shall
have power to lay and collect taxes on
income derived from securities issued,
after the ratification of this article, by
or under the authority of any State, but
without discrimination against income de-
rived from such securities and in favor
of income derived from securities issued,
after the ratification of this article, by or
under the authority of the United States
or any other State.

"Sec. 2. Each State shall have power
to lay and collect taxes on income derived
by its residents from securities issued,
after the ratification of this article, by or
under the authority of the United States ;
but without discrimination against in-
come derived from such securities and in
favor of income derived from securities
issued, after the ratification of this article,
by or under the authority of such State. "

This resolution passed the House of Rep-
resentatives on January 23, 1923, but failed

144 TAXATION: THE PEOPLE'S BUSINESS

of passage in the Senate. It was reintro-
duced in identical words in the succeeding
Congress as II. J. Ees. 136, 68th Congress,
1st Session ; and on February 8, 1924, failed
to pass the House of Representatives, thus
bringing to a close, for the present, the
effort to restrict by Constitutional amend-
ment further issues of tax-exempt securi-
ties.

The situation with regard to tax-exempt
securities presents a serious problem to the
country. The Treasury has estimated that
the amount of such securities outstanding on
February 29, 1924, was $12,521,000,000 (see
Appendix C). These securities would
be unaffected even by a Constitutional
amendment, so that there is no immediate
remedy for the situation within the power
of Congress except the readjustment of the
surtaxes on a basis that will permit capital
to seek productive employment and keep it
from exhausting itself in tax-exempt secur-
ities.

Various measures have been proposed,

TAX-EXEMPT SECURITIES 145

both in and out of Congress, for meeting the
situation. One proposal was that, instead
of passing an amendment to the Constitu-
tion permitting taxation by the Federal Gov-
ernment of income from State securities sub-
sequently issued and giving reciprocal rights
to the States, a bill should be passed by Con-
gress taxing the income on State and munici-
pal securities now existing and requiring that
the statute be not held void without the con-
currence of at least all but one of the
Supreme Court Justices, and that it shall
continue in full force and effect irrespective
of the decision of any inferior court.

The general consensus of opinion is that
such a bill would be clearly unconstitutional.
A digest of the decisions and arguments af-
fecting the question of whether Congress has
the power to levy a tax upon the income from
securities issued by the States or political
subdivisions thereto was made and is set
forth in a letter dated January 4, 1924, from
Mr. A. W. Gregg, of the Treasury, to the
Chairman of the Committee on Ways and

146 TAXATION: THE PEOPLE'S BUSINESS

Means of the House of Representatives (see
Appendix D).

The measure proposed would apply only
to municipal and State securities and would
not apply to securities created by Congress.
Such discrimination would be indefensible,
for it would permit the United States to tax
securities issued by a State or its subdivi-
sions but would not allow the State to tax
securities issued by the Federal Government.

The proposed Constitutional amendment
(H. J. Res. 136), on the other hand, would
be reciprocal ; that is, both State and United
States securities thereafter issued would be
taxable. Furthermore, the proposed Con-
stitutional amendment would cover only se-
curities issued subsequently to its adoption
and would not affect existing securities in
the hands of innocent holders.

Tax exemption was a material factor in
fixing the price at which these securities
were sold to their present owners. As an
example of what this means, the First Lib-
erty 31/2*8 are fully tax-exempt; the 4^4's of

TAX-EXEMPT SECURITIES 147

the same issue and maturity are exempt as
to normal tax only. Based upon the average
market price of these bonds during Decem-
ber, 1923, the removal of the exemption from
surtax would drop the price from 99.7% to
87.2%, or a loss of $125 for a $1,000 bond;
and removal of the normal tax exemption
would reduce the price further to 82.4%, or
a total loss of $173 on each $1,000 bond. A
similar situation would, of course, exist in
every municipal and State bond. This is the
value of tax exemption sold and paid for. It
is proposed to confiscate this value and to
pay nothing for it. Irrespective of its valid-
ity, such legislation would seem to be dis-
honest.

The legal case for the measure proposed
is based on what some Justices of the
Supreme Court may have said in their dis-
senting opinions, so that there is a grave
Constitutional question involved and the
probability of the act being declared uncon-
stitutional greatly exceeds the probability of
its constitutionality. The question can only

148 TAXATION: THE PEOPLE'S BUSINESS

be decided by an opinion of the United States
Supreme Court on a case duly brought before
it. If such a measure as that proposed were
passed by Congress, it would affect income
received by taxpayers in the current year,
which is returnable for taxation in the year
following. Some time later a decision would
be obtained from the Supreme Court. In
the meantime, the doubt of the law's validity
would completely destroy the market for all
State and municipal bonds, because the in-
vestor would be unwilling to purchase bonds
at a price justified by their tax-exempt fea-
ture, and the States and the municipalities
would be charged with negligence if they sold
their bonds on the basis of not being tax-
exempt.

It will be recalled that a similar situation
arose a few years ago when there was no
market for Federal Farm Loan Bonds for
several years until the Supreme Court passed
upon the constitutionality of the tax-exempt
feature. This condition of uncertainty would
exist irrespective of what might ultimately

TAX-EXEMPT SECURITIES 149

be the decision. If eventually the Supreme
Court should determine that the act was
unconstitutional, then nothing would have
been accomplished by the measure proposed
and it would be necessary to start over with
a Constitutional amendment. At that time
the Government would have to refund enor-
mous sums of money which it had collected
on the tax-exempt income and was wrong-
fully withholding from the owners, together
with interest on these sums. The effect on
the Government's budget in making repay-
ment of the amounts, which it would then
have spent and which it had no right to col-
lect or hold, would be most serious.

To summarize, first, such a measure as
that proposed makes an indefensible dis-
crimination between securities issued by
States and municipalities and securities
issued under authority of Congress ; second,
it confiscates, without compensation, prop-
erty values which have been paid for by the
investor; third, it would seriously disturb
the State and Federal Government finances;

150 TAXATION: THE PEOPLE'S BUSINESS

and finally the entire proceeding would most
probably be vain and the time utterly wasted.
It would seem far better to abandon projects
of the kind described, which are unsound,
unfair, and in all probability vain, and to
redouble efforts in favor of a Constitutional
amendment affecting further issues of tax-
exempt securities and also to effect a reduc-
tion of the surtaxes affecting, through eco-
nomic incentive, the tax-exempt securities at
present outstanding.

Another contention which has been ad-
vanced is that, so long as there are high sur-
taxes, there ought to bo tax-exempt securities
to provide relief from those surtaxes. There
is no question of the fact that to sanction
the continued issuance of securities carrying
full exemptions from taxation and at the
same time to attempt to levy Federal income
surtaxes running as high as 58%, when com-
bined with the normal tax, creates an impos-
sible situation, since the tax exemptions of
the securities will tend to defeat the collec-
tion of the taxes. The Treasury has accord-

TAX-EXEMPT SECURITIES 151

ingly urged that action be taken, first, to
restrict further issues of tax-exempt secur-
ities, in order to block this avenue of escape
from the surtaxes, and second, to reduce
the surtax rates to a reasonable level, with
a maximum of 25%, amounting to 31% when
combined with the normal tax. This would
provide a workable system and in the long
run produce more revenue than the present
rates.

The high surtaxes date from the Revenue
Act of 1917, and until that time tax-exempt
securities presented a problem of but small
magnitude since most taxes were levied at
level rates and it could generally be said that
the loss of taxes was roughly made up by the
saving in interest costs. With taxes at flat
rates the exemption is worth about as much
to one taxpayer as another; and, barring
any questions as to conflicting State and Fed-
eral jurisdiction, it could be said with some
force that, if the State or Federal Govern-
ments were to tax the securities which they
themselves issued, purchasers of the secur-

152 TAXATION: THE PEOPLE'S BUSINESS

ities would insist on an interest yield high
enough to compensate for the taxes levied.
The Federal surtaxes have changed all this
and created an entirely different problem.
The exemption to which the greatest impor-
tance now attaches is the exemption from
Federal surtaxes and the value of this ex-
emption depends entirely upon the income of
the individual taxpayer. Generally speak-
ing, it will be greatest in the case of the
wealthiest taxpayer, while to the person pay-
ing only a normal tax or a low surtax the
exemption will be relatively of little value.
This makes it quite impossible, as a practical
matter, for the borrowing State or Federal
Government to obtain full value for the ex-
emption carried by the securities, for in the
nature of things the securities will be sold
in the open market at quoted prices adjusted
to market conditions, though to one pur-
chaser the exemption may be worth little or
nothing and to another purchaser, who pays
the same price, the exemption may be worth
the equivalent of 10 or 11% on a taxable
security.

TAX-EXEMPT SECURITIES 153

Another fundamental difference is that the
surtaxes are levied by the Federal Govern-
ment while the tax-exempt securities are, for
the most part, issued by the State and munici-
pal Governments. In other words the Fed-
eral Government gets no compensating
advantages whatever from any reduction in
interest rates that may accrue to the State
or municipal Government through the tax-
exempt privilege, so that the tax exemption
from Federal surtaxes is in fact an involun-
tary subsidy conferred upon State and
municipal Governments by the Federal Gov-
ernment at the expense of its own revenues.
It does not meet this objection to say that,
whether the State or Federal Governments
are involved, it is all one body of taxpayers.
While this is undoubtedly a valid argument
in support of uniformity of treatment as be-
tween the State and Federal Governments,
it cannot be advanced in support of a system
which permits taxpayers to avoid their taxes
to the Federal Government by purchasing
securities issued by or under authority of
the States.

154 TAXATION: THE PEOPLE'S BUSINESS

The facts are that the Federal Government,
under the power granted by the 16th amend-
ment to the Constitution of the United States,
now levies income taxes on individual in-
comes, and is imposing graduated additional
income taxes, commonly known as surtaxes,
on the higher incomes. At the same time
the States and municipalities are issuing a
growing volume of tax-exempt securities, the
income from which is wholly exempt from
these very surtaxes, while the Federal Gov-
ernment, though under our present Consti-
tutional system it could itself issue fully tax-
exempt securities, has for some years past
consistently refrained from issuing such se-
curities in order to protect the public rev-
enues. The Federal Government might
change this policy, and by issuing its own
securities with full tax exemptions cancel
much of the artificial value of State and mu-
nicipal securities, but this would merely swell
the volume of tax-exempt issues and still
further endanger the revenues.

It must be clear that graduated additional

TAX-EXEMPT SECURITIES 155

income taxes cannot be effective when there
exist side by side with them practically un-
limited quantities of fully tax-exempt securi-
ties available to defeat them, and that either
some way must be found to stop the con-
tinued issuance of tax-exempt securities or
the Federal Government must find some sub-
stitute for the surtaxes. The issue is imme-
diate and serious, for the yield of the surtaxes
has already been reduced to a relatively small
sum as compared with the early years, and
the persistence of the present system is dis-
torting our whole economic structure and
hampering the development of business and
industry throughout the country. A Consti-
tutional amendment along the lines proposed
in H. J. Ees. 136 would correct the situation
and would put State and Federal Govern-
ments on an exact equality.

Whatever opposition there is to the pro-
posed amendment to restrict further issues
of tax-exempt securities rests upon a misun-
derstanding of the object and effect of the
amendment, and this, in turn, harks back to

156 TAXATION: THE PEOPLE'S BUSINESS

the old controversies about States' rights and
the powers of the Federal Government.
Separated from these old prejudices and
taken from the point of view of the facts as we
have to face them today, the proposed Con-
stitutional amendment involves no question
whatever of States' rights and makes no at-
tack whatever on the credit or borrowing
power of the States or their political subdi-
visions. The amendment would apply with
absolute equality to the Federal Government,
on the one hand, and the States and their po-
litical subdivisions on the other, and the in-
terests of the general welfare would put
exactly the same restrictions upon future
borrowings by the Federal Government as
upon future borrowings by the States and
their political subdivisions. The constantly
growing mass of tax-exempt securities threat-
ens the public revenues, not only of the Fed-
eral Government, but of the States as well,
and it is reaching such proportions as to
undermine the development of business and
industry.

TAX-EXEMPT SECURITIES 157

The Federal Government, for the most
part, has refused to have recourse to tax-
exempt issues in financing its own operations,
but the volume of tax-exempt securities of
the States and their political subdivisions,
and of other agencies, already outstanding
and currently issued is so large that the value
of the exemption to the borrower issuing the
securities has become relatively insignificant.
Even now the States and their political sub-
divisions, notwithstanding the full tax exemp-
tions on their securities, are obliged to pay
substantially the same rates on their tax-
exempt borrowings as the Federal Govern-
ment pays on securities without exemption
from Federal income surtaxes. The facts are
that under our system of graduated Federal
income surtaxes the issue of tax-exempt
securities, while of constantly diminishing ad-
vantage to the borrowing State, or city, pro-
vides a perfect refuge for wealthy investors,
being most valuable to the wealthiest tax-
payer. The actuarial figures show that to
taxpayers paying surtaxes in the highest

158 TAXATION: THE PEOPLE'S BUSINESS

brackets securities subject to Federal income
surtaxes would have to yield about 12 per cent
in order to be as attractive as a 5 per cent
tax-exempt security. For this great advan-
tage the State which issues the securities gets
but very little compensating return, and cer-
tainly no greater return from the wealthiest
investor than from the smallest investor (to
whom the exemption is relatively worthless),
while the United States, which imposes the
surtaxes, loses its revenue without any com-
pensating advantage whatever. It is the
graduated surtax, of course, that gives the
greatest value to the tax exemption; and
viewed from this aspect the tax exemption, in
substance, constitutes a subsidy from the
Federal Government, the cost of which in the
long run must fall on those taxpayers who do
not or cannot take refuge in tax-exempt se-
curities.

Even from the point of view of the States
themselves, it is clear that the continued is-
suance of tax-exempt securities saves noth-
ing to the taxpayers in the States and that in

TAX-EXEMPT SECURITIES 159

the long run it brings heavier taxes. The
tax-exempt privilege, with the facility that
it gives to borrowing, leads in many cases to
unnecessary or wasteful public expenditure,
and this in turn is bringing about a menacing
increase in the debts of States and cities.
These debts constitute a constantly growing
charge upon the taxpayers in the several
States, and will ultimately have to be paid,
principal and interest, through tax levies
upon these very taxpayers. It is easy to over-
look this when the debts are incurred, but it
is none the less impossible to escape the facts
when the time comes for payment. It is also
necessary to bear in mind that in the long
run all of these public debts, whether the
debts of States and their political subdivi-
sions or of the Federal Government itself,
as well as the taxes which must be imposed
to meet them, fall upon but one body of tax-
payers, and that the apparent advantage of
borrowing by States and cities at the expense
of the Federal revenues is illusory, since any
temporary advantages thus obtained will

160 TAXATION: THE PEOPLE'S BUSINESS

have to be paid for by the Federal Govern-
ment at the expense ultimately of the great
body of taxpayers. This is particularly true
of tax-exempt securities, for their effect is to
provide a refuge from taxation for certain
classes of taxpayers, with correspondingly
higher taxes on all the rest in order to make
up the resulting deficiency in the revenues.
Once it is understood no one can raise any
valid objection to the proposed Constitutional
amendment restricting further issues of tax-
exempt securities. As a matter of fact, it is
almost grotesque to permit the present
anomalous situation to continue, for as things
now stand we have on the one hand a system
of highly graduated Federal income surtaxes
and on the other a constantly growing vol-
ume of securities issued by States and cities
which are fully exempt from these surtaxes,
so that taxpayers have only to buy tax-ex-
empt securities to make the surtaxes ineffec-
tive. The only way to correct this condition
is by Constitutional amendment, accom-
panied by a reduction in the rates.

TAX-EXEMPT SECURITIES 161

H. J. Ees. 136 expressly provides in Sec-
tion 1 that Federal taxes on income derived
from securities, issued after the ratification
of the article, by or under the authority of
any State, must be without discrimination
against income derived from such securities
and in favor of income derived from securi-
ties issued after the ratification of the article
by or under the authority of the United
States or any other State. The same pro-
tection for the Federal Government is ac-
corded by the second Section, conferring
power on the States to lay and collect taxes
on income derived from securities issued
after the ratification of the article by or un-
der the authority of the United States. Un-
der Section 1 as it stands it would be impos-
sible for the Federal Government to impose
an income tax on income from future issues
of State or municipal bonds without imposing
the same tax on income derived from future
issues of its own bonds; and as a practical
matter it is almost inconceivable that Con-
gress would be willing to impose such a tax

162 TAXATION: THE PEOPLE'S BUSINESS

upon the income from both State and Federal
securities and at the same time exempt from
the tax income derived from securities issued
by private corporations. Such a course would
be repugnant to every Constitutional prin-
ciple.

Entirely apart from the practical impos-
sibility of such a situation, however, it is
clear that the Constitutional amendment
(H. J. Res. 136) would prohibit discrimina-
tion against the bonds of a State and in
favor of a railroad or industrial corporation.
All corporations in this country are organ-
ized under either State or Federal law and
derive their powers, including the power to
borrow money, from charters issued by the
State or Federal Governments as the case
may be. Securities issued by private cor-
porations, therefore, may be said to be issued
"under the authority of " the United States,
in the case of a Federal corporation, or the
State of incorporation, in the case of a State
corporation. Section 1 of the Constitutional
amendment expressly prohibits discrimina-

TAX-EXEMPT SECURITIES 163

tion in favor of securities issued after rati-
fication of the article under the authority of
the United States or any other State. This
in terms would prevent discrimination in
favor of any bonds issued by a railroad or
industrial corporation incorporated under
the laws of the United States or of any other
State, and likewise, by a corporation organ-
ized under the laws of the State concerned,
for it would be Constitutionally impossible
for the Federal Government to single out
corporations of one State in the granting of
tax exemptions. If there were any danger
here, however, it could readily be corrected
by striking out in the last line of Section 1
the word " other. "

Even after the adoption of the proposed
Constitutional amendment, neither the
United States nor any State would have
power to tax securities of the other already
issued and outstanding; and under generally
accepted Constitutional principles, which
have been affirmed by the Supreme Court, the
Federal Government cannot levy income

164 TAXATION: THE PEOPLE'S BUSINESS

taxes upon the salaries of State or munici-
pal officers, nor can the States levy income
taxes upon the salaries of Federal officers.
To forbid discrimination in favor of these
non-taxable sources of income would, in ef-
fect, make the Constitutional amendment in-
operative. There are also other generally
recognized distinctions, as, for example,
between earned and unearned income, and
miscellaneous special exemptions. These
difficulties would embarrass the State Gov-
ernments, in proceeding under the Constitu-
tional amendment, quite as much as they
would the Federal Government, and would
make it impossible for the States to levy any
income tax upon future issues of Federal
securities without at the same time imposing
an income tax on all outstanding issues of
their own securities, and, in fact, a general
income tax upon all sources of income sub-
ject to State taxation. Even if it could be
Constitutionally done, to levy income taxes
upon securities already issued as tax-exempt
would constitute a gross breach of faith,

TAX-EXEMPT SECURITIES 165

while to require a general and uniform in-
come tax, with exactly the same taxation of
income from securities as of all other sources
of income, would involve almost insuper-
able practical difficulties and probably prove
impossible.

The Constitutional amendment, as drawn
in H. J. Res. 136, puts the Federal Govern-
ment and the States on absolutely the same
basis, and the very fact that the Federal
Government is ready and willing, for the
sake of the general welfare, to place itself
under these restrictions as to future issues of
tax-exempt securities, notwithstanding its
own heavy debt and the practical certainty
that it will always have obligations outstand-
ing and to be financed, gives the best possible
assurance that the States and their political
subdivisions can place themselves under like
restrictions without endangering their
credit or embarrassing their necessary
borrowings.

In proposing a Constitutional amendment,
the Federal Government is not asking from

166 TAXATION: THE PEOPLE'S BUSINESS

the States any more than it is willing to yield
for itself. Tax exemption acquires quite a
disproportionate value when taxes are not
at a level rate but are levied at graduated
rates; and the Federal surtaxes are almost
wholly responsible for the extraordinary
value which tax-exempt securities enjoy to-
day. It is nonsense to refer to this value as
something which the States have the right
to enjoy in selling their securities, for the
value depends in large measure on the rela-
tive scarcity of tax-exempt securities and the
Federal Government could seriously impair,
and nearly destroy, it by issuing all its own
securities exempt from surtaxes. Contrari-
wise, since the value of the exemption turns
largely on the existence of graduated sur-
taxes, the Federal Government could cer-
tainly reduce and probably destroy the pres-
ent premium on tax-exempt securities by
changing its own tax system and substitut-
ing for the income surtaxes some other form
of tax which would not be affected by the
presence of tax-exempt securities, as, for

TAX-EXEMPT SECURITIES 167

example, a tax on sales or expenditures. It
may, in fact, be driven to some such change
by force of necessity if the present situation
continues and enough of the States cling to
the privilege of issuing securities that give
rich investors the power, at the expense of
the rest of the community, to escape from
the common burdens of taxation.

The Treasury has strongly recommended
that the surtaxes be reduced to a maximum
of 25 per cent; that is to say, a maximum
combined normal and surtax of 31 per cent.
It believes that a revision of the surtaxes on
substantially this basis is fundamentally
necessary if our present internal revenue
system is to be successfully administered. A
revision to substantially the basis recom-
mended by the Treasury would correct to
some extent the evil of tax-exempt securi-
ties, since it would reduce the pressure to es-
cape taxable income, but the evil would none
the less remain and would still be serious,
at least so long as there were any material
graduation of surtax rates. For example,

168 TAXATION: THE PEOPLE'S BUSINESS

even with a maximum surtax of 25 per cent
there would still be a material inducement
for large investors to reduce taxable income,
and to an investor paying surtaxes at the
rate of 25 per cent a fully tax-exempt se-
curity would offer substantial advantages as
compared with a surtaxable security, while
the tax-exempt security would, of course, be
far more valuable to such an investor than
to a small investor. Lower surtaxes, in other
words, would mitigate the evil but would not
go to the heart of the situation, for tax
exemptions would still persist and tend to
defeat any taxes levied at the revised rates.
The Federal Government is issuing each
year substantial amounts of new securities
and for many years to come will be issuing
new securities every year, probably in
amounts larger than the aggregate of State
and municipal issues during the year, in
order to refund its obligations previously
issued. Between now and the end of 1928,
for example, about $8,000,000,000 of bonds,
notes and certificates issued by the Federal

TAX-EXEMPT SECURITIES 169

Government will mature and in large meas-
ure these maturing obligations will have to
be refunded. Any of these refunding obli-
gations issued after the ratification of the
Constitutional amendment would be subject
to its provisions in the same manner as State
or municipal obligations issued after its
ratification. The same would be true of
other refunding obligations issued by the
Federal Government in succeeding years.
To show how completely false is the argu-
ment referred to above, it is enough to call
attention to the fact that the whole war debt
of the Federal Government actually matures
within the next thirty years, with substantial
maturities falling at frequent intervals.
These maturing obligations will either be re-
deemed, in which event the tax exemptions
they now carry will cease to be of any impor-
tance, or will be refunded into other obliga-
tions; and these refunding obligations, if
issued after the ratification of the Constitu-
tional amendment, will be subject to its
provisions.

170 TAXATION: THE PEOPLE'S BUSINESS

Nothing can serve to obscure the main
facts in the situation upon which the Treas-
ury relies in urging support for the proposed
Constitutional amendment, namely, that the
continued issuance of tax-exempt securities
is building up a constantly growing mass of
privately held property exempt from all tax-
ation; that tax exemption in a democracy
such as ours is repugnant to every Constitu-
tional principle, since it tends to create a
class in the community which cannot be
reached for tax purposes and necessarily in-
creases the burden of taxation on property
and incomes that remain taxable ; and that it
is absolutely inconsistent with any system of
graduated income surtaxes to provide at the
same time securities which are fully exempt
from all taxation, since the exemptions will
sooner or later defeat at least all the higher
graduations and will always be worth far
more to the wealthier taxpayers than to the
small ones.

The argument has been advanced that the
reduction in the high surtax rate will have

TAX-EXEMPT SECURITIES 171

no effect upon business, because the most it
will mean is simply a shifting of investments,
and some one must purchase the tax-exempt
securities if they are sold. Before the im-
position of the high surtaxes, municipal and
State bonds had a wide market. They were
well regarded by the investor and found
their way into trust funds and into the strong
boxes of the conservative investors no longer
in active business. Men of initiative and
activity did not acquire these securities.
Their wealth, therefore, was left free to be
devoted to productive business. Under high
surtax rates, tax-exempt securities, without
risk, afforded a greater net return than pro-
ductive business with risk could provide,
and men with the capacity to produce found
it more remunerative to produce nothing.
High surtaxes are no more than a bonus at
the expense of the Federal Government to
the State and municipal borrower, giving a
wholly artificial value to tax exemption. This
both encourages the municipalities to ex-
travagance and brings into existence in this

172 TAXATION: THE PEOPLE'S BUSINESS

country a large mass of wealth that cannot
be reached for the support of the Govern-
ment. A removal of the artificial value of
tax exemption will restore all securities to
natural conditions. True, State and munici-
pal extravagance will be curtailed, but their
bonds will sell on their merits to the same
class of investors who heretofore favored
them. The men capable of business success
will get out of their dead investments and
put their brains and money to work.

We come back, in the end, to the original
argument, that high surtaxes are becoming
less and less productive of revenue to the
Government and at the same time are injur-
ing business initiative. All business involves
risk. If business loses, the Government
shares not at all in the loss ; if business suc-
ceeds, the Government takes more than half
the gain. What can long withstand these
odds ? Capital does not care to take risks on
these terms. The spirit of initiative may
still be there, but the present high surtaxes
are driving it into idleness. America will

TAX-EXEMPT SECURITIES 173

become a nation of followers, not leaders.
There is no escape from the conclusion that a
tax system having this inevitable result
must be changed.

APPENDIX A

LETTER FROM THE SECRETARY OF THE TREASURY

TO THE ACTING CHAIRMAN OF THE

COMMITTEE ON WAYS AND MEANS

TREASURY DEPARTMENT,

OFFICE OF THE SECRETARY,
Washington, November 10, 1923.

DEAR MR. GREEN :

In accordance with the request which you
made shortly after the adjournment of Con-
gress, the Treasury has been engaged for the
past few months in considering the possi-
bilities of tax revision and in developing rec-
ommendations for the simplification of the
law. The situation has developed more fa-
vorably than was anticipated, and I am now
presenting to you a comprehensive program
to which I hope the Committee on Ways and
Means will be able to give consideration at
the outset of the legislative session.

The fiscal years 1922 and 1923 have each
closed with a surplus of about $310,000,000

176

176 TAXATION: THE PEOPLE'S BUSINESS

over and above all expenditures chargeable
against ordinary receipts, including the sink-
ing fund and other similar retirements of tbe
debt. This has been possible only through
the utmost cooperation between the Execu-
tive and Congress, as well as among the ex-
ecutive departments and establishments, all
of whom have united in a sincere effort to
reduce the expenditures of the Government.
At the same time there has been a substantial
amount of realization upon securities and
other assets remaining over from the war,
and the Treasury has succeeded in collecting
customs and internal revenue taxes in
amounts somewhat exceeding original expec-
tations. The result is that the Government
of the United States is firmly established on
'ic basis of having balanced its budget each
year since the cessation of hostilities, with a
reasonable surplus each year after providing
for fixed debt charges like the sinking fund,
and stands squarely committed to the policy
of including these fixed charges on account of
the public debt in its ordinary budget each
year, thus assuring an orderly reduction of
the war debt out of current revenues.

What has been done during the two years
since the establishment of the budget system

APPENDIX A 177

shows clearly what united effort can accom-
plish, and gives every reason for hope that
the task to which the Administration has set
itself for this fiscal year can be successfully
performed, namely, the reduction of the ordi-
nary expenditures of the Government to a
total of not more than $3,500,000,000, of which
about $500,000,000 will be fixed charges on
account of the sinking fund and other retire-
ments of the debt. To do this means reduc-
tions of about $170,000,000 in the estimates of
expenditures submitted by the spending
departments and establishments and the exer-
cise of continued pressure all along the line
for the utmost economy and efficiency in the
operations of the Government.

Having these tilings in mind, the Treasury
has been canvassing the estimates for the
present fiscal year and for the succeeding
fiscal years with a view to determining on the
one hand what further reductions in expendi-
ture it would be safe to count on in developing
a tax-revision program, and on the other
hand what receipts might reasonably be ex-
pected on the basis of existing law, assuming
that no changes were to be made in internal
taxes. In doing this it has had to keep in
mind that under present conditions receipts

178 TAXATION: THE PEOPLE'S BUSINESS

from customs are abnormally high and that
surplus war supplies have now been for the
most part liquidated, leaving relatively little
to expect on this account in the years to come.
It has also had to keep in mind that many of
the internal revenue taxes, as, for example,
the higher brackets of the surtax, are so
rapidly becoming unproductive that it is un-
safe to assume that even with no changes in
the law the revenues from internal taxes
would be maintained. After taking into ac-
count all these considerations, and making
the most conservative estimates about the
yield of existing taxes and the possibilities
of further reductions in expenditure, it ap-
pears that for this year, and for the next four
or five years, there should be a surplus of
something over $300,000,000 a year over and
above all expenditures chargeable to the ordi-
nary budget, including the fixed debt charges
payable out of current revenues. This gives
a reasonable margin not merely for tax re-
vision but also for tax reduction.

On this basis the Treasury has the follow-
ing recommendations to make :

1. Make a 25 per cent reduction in the tax
on earned income. — The fairness of taxing
more lightly income from wages, salaries and

APPENDIX A 179

professional services than the income from a
business or from investment is beyond ques-
tion. In the first case, the income is uncertain
and limited in duration ; sickness or death de-
stroys it and old age diminishes it. In the
other, the source of the income continues ; it
may be disposed of during a man's life and
it descends to his heirs. It is estimated that
this amendment will mean a loss in revenue of
about $97,500,000 a year, the greater part of
which falls in the lower income brackets.

2. Where the present normal tax is 4 per
cent reduce it to 3 per cent, and where the
present normal tax is 8 per cent reduce it to
6 per cent. — This affects all personal incomes
and the loss of revenue comes largely from
the lower brackets. It is estimated that thirf
will mean a loss in revenue of $91,600,000 a
year.

3. Reduce the surtax rates by commencing
their application at $10,000 instead of $6,000,
and scaling them progressively upwards to
25 per cent at $100,000. — This will readjust
the surtax rates all along the line, and the
Treasury recommends the readjustment not
in order to reduce the revenues but as a
means of saving the productivity of the sur-
taxes. In the long run it will mean higher

180 TAXATION: THE PEOPLE'S BUSINESS

rather than lower revenues from the surtaxes.
At the outset it may involve a temporary loss
in revenue, but the Government Actuary esti-
mates that even during the first year, if the
revision is made early enough, the net loss in
revenue from all the changes in the surtaxes
would be only about $100,000,000, and that in
all probability the revenue from the reduced
rates will soon equal or exceed what would
accrue at the present rates, because of the
encouragement which the changes will give to
productive business.

The readjustment of the surtaxes, more-
over, is not in any sense a partisan measure.
It has been recommended, on substantially
this basis, by every Secretary of the Treasury
since the end of the war, irrespective of party.
The present system is a failure. It was an
emergency measure, adopted under the pres-
sure of war necessity and not to be counted
upon as a permanent part of our revenue
structure. For a short period the surtaxes
yielded much revenue, but their productivity
has been constantly shrinking and the Treas-
ury's experience shows that the high rates
now in effect are progressively becoming less
productive of revenue. See Table II, hereto
attached. The high rates put pressure on tax-

APPENDIX A 181

payers to reduce their taxable income, tend to
destroy individual initiative and enterprise,
and seriously impede the development of pro-
ductive business. Taxpayers subject to the
higher rates can not afford, for example, to
invest in American railroads or industries or
embark upon new enterprises in the face of
taxes that will tako 50 per cent or more of
any return that may be realized. These tax-
payers are withdrawing their capital from
productive business and investing it instead
in tax-exempt securities and adopting other
lawful methods of avoiding the realization of
taxable income. The result is to stop busi-
ness transactions that would normally go
through, and to discourage men of wealth
from taking the risks which are incidental to
the development of new business. Ways will
always be found to avoid taxes so destructive
in their nature, and the only way to save the
situation is to put the taxes on a reasonable
basis that will permit business to go on and
industry to develop. This, I believe, the read-
justment herein recommended will accom-
plish, and it will not only produce larger reve-
nues but at the same time establish industry
and trade on a healthier basis throughout the
country. The alternative is a gradual break-

182 TAXATION: THE PEOPLE'S BUSINESS

down in the system, and a perversion of in-
dustry that stifles our progress as a nation.

The growth of tax-exempt securities, which
has resulted directly from the high rates of
surtax, is at the same time encouraging ex-
travagance and reckless expenditure on the
part of local authorities. These State and
local securities will ultimately have to be
paid, principal and interest, out of taxes, thus
contributing directly to the heavy local taxa-
tion which bears so hard on the farmers and
small property owners. There is no iftime-
diate remedy for this within the power of
Congress except the readjustment of the sur-
taxes on a basis that will permit capital to
seek productive employment and keep it from
exhausting itself in tax-exempt securities.
The productive use of capital in our railroads
and industries will also tend to bring lower
costs for transportation and manufactured
products, thus helping to relieve the farmer
from the maladjustment from which he now
suffers.

4. Limit the deduction of capital losses to
12 Va Per cent °f ^e loss. — The present reve-
nue law limits the tax on capital gains to
12% per cent but puts no limit on the capital
losses. It is believed it would be sounder

APPENDIX A 183

taxation policy generally not to recognize
either capital gain or capital loss for pur-
poses of income tax. This is the policy
adopted in practically all other countries
having income tax laws, but it has not been
the policy in the United States. In all prob-
ability, more revenue has been lost to the
Government by permitting the deduction of
capital losses than has been realized by in-
cluding capital gains as income. So long,
however, as our law recognizes capital gains
and capital losses for income tax purposes,
gain and loss should be placed upon the same
basis, and the provision of the 1 921 Act tax-
ing capital gains at 121^ per cent should be
extended to capital losses, so that the amount
by which the tax may be reduced by the capi-
tal loss will not exceed 12 V^ per cent of the
loss. It is estimated that this will increase
the revenues by about $25,000,000.

5. Limit the deductions from gross income
for interest paid during the year and for
losses not of a business character to the
amount the sum of these items exceeds tax-
exempt income of the taxpayer. — The 1921
Act provides that interest on indebtedness to
acquire or carry tax-exempt securities is not
deductible. This provision is ineffective be-

184 TAXATION: THE PEOPLE'S BUSINESS

cause a taxpayer may purchase tax-exempt
securities for cash and borrow money for
other purposes. It is felt also that so long
as a taxpayer has income which is not reached
for taxation, he should not be permitted to
deduct his non-business losses from the in-
come which is taxable, but should be re-
stricted in the first instance to a deduction
of these losses from his non-taxable income.
The estimated increase of revenue from this
source is $35,000,000.

6. Tax community property income to the
spouse having control of the income. — In
some States the income of the husband is a
joint income of the husband and wife, and
each, therefore, is permitted to file a return
for one-half of the income. This gives an
unfair advantage to the citizens of those
States over the citizens of the other States
of this country, and this amendment seeks
to restore the equality. It is estimated that
it will increase revenues by $8,000,000.

So much for the income tax recommenda-
tions, which should become effective January
1, 1924. In order that you may have before
you a clear view of the effect of these recom-
mendations as applied to incomes in the vari-
ous brackets, I am attaching a table, prepared

APPENDIX A

185

by the Government Actuary, showing the es-
timated results of the proposed changes in
the calendar year 1925, on the basis of the
taxable year 1924. The schedule shows a
loss of revenue of about $92,000,000 in the
brackets under $6,000, and a further loss of
revenue of about $52,000,000 in the next
bracket of $6,000 to $10,000. In short, about
70 per cent of the reduction would be in the
brackets of $10,000 or less, and less than 5
per cent would fall in the brackets over
$100,000.

To show the effect of the proposed changes
on the income of a typical salaried taxpayer,
married and having two children, I call your
attention to the following comparative
figures :

Saving

Income
$4,000
5,000
6,000
7,000
8,000
9,000
10,000

Present tax
$28.00
68.00
128.00
186.00
276.00
366.00
456.00

Proposed tax
$15.75
38.25
72.00
99.00
144.00
189.00
234.00

to taxpayer
$12.25
29.75
56.00
87.00
132.00
177.00
222.00

7. Repeal the tax on telegrams, telephones
and leased wires. — This is the last of the
transportation taxes established during the
war, is a source of inconvenience to every
person using the telephone or telegraph, and

186 TAXATION: THE PEOPLE'S BUSINESS

should now be eliminated from the tax sys-
tem. This would mean a loss in revenue of
about $30,000,000 a year.

8. Repeal the tax on admissions. — The
greater part of this revenue is derived from
the admissions charged by neighborhood
moving picture theatres. The tax is, there-
fore, paid by the great bulk of the people
whose main source of recreation is attending
the movies in the neighborhood of their
homes. This would mean a loss in revenue of
about $70,000,000.

9. Miscellaneous nuisance taxes. — Your
Committee may wish to consider the elimi-
nation of various small miscellaneous taxes
which have an inconsiderable bearing on the
general revenue of the Government, but
which are a source of inconvenience to tax-
payers and difficult to collect; and possibly
there are some articles of jewelry which ac-
cording to our standard of living cannot
properly be denominated luxuries, such as,
for instance, ordinary table silver or watches,
which you may wish to exempt from the gen-
eral tax on jewelry. There is not enough
margin of revenue available to permit the
repeal of the special taxes which are proving
productive, but the law could be revised to

APPENDIX A 187

good advantage and some of the nuisance
taxes repealed without material loss of
revenue.

10. In addition to the specific recommen-
dations which directly affect Government
revenues, there should be amendments to
strengthen the Act and eliminate methods
heretofore used by taxpayers to avoid im-
position of the tax. The exact amount of
additional revenue to the Government which
will be brought in by these amendments can-
not be estimated, but certainly the amend-
ments will reach much income that heretofore
has escaped taxation.

11. Establish a Board of Tax Appeals in
the Treasury but independent of the Bureau
of Internal Revenue, to hear and determine
cases involving the assessment of internal
revenue taxes. — This will give an indepen-
dent administrative tribunal equipped to
bear both sides of the controversy, which will
sit on appeal from the Bureau of Internal
Revenue and whose decision will be conclu-
sive on both the Bureau and the taxpayer on
the question of assessment. The taxpayer,
in the event that decision is against him, will
have to pay the tax according to the assess-
ment and have recourse to the courts, while

188 TAXATION: THE PEOPLE'S BUSINESS

the Government, in case decision should be
against it, will likewise have to have recourse
to the courts, in order to enforce collection
of the tax.

12. Changes should be made in the present
law to simplify administration, make the law
more easily understood, and permit a prompt
determination of liability in a manner more
satisfactory to the taxpayer.

In order that you may see the effect on
Government revenues of the above recom-
mendations, I submit the following figures
as to the estimated result of these changes :

Decrease Increase
(in mil- (in mil-
lions of lions of
dollars) dollars)

Reduction of 25% in tax on earned income 97

Reduction in normal tax 92

Readjustment of surtax rates 102

Capital loss limited to \2l/2% 25

Interest and capital loss deductions limited . . 35

Community property amendment 8

Repeal of telegraph and telephone tax 30

Repeal of admissions tax 70

TOTAL 391 68

68

NET Loss 323

The benefits of the reduction will be dis-
tributed among all classes of taxpayers, and
the revision generally will help to free busi-
ness and industry of vexatious interference

APPENDIX A 189

and encourage in all lines a more healthy
development of productive enterprise.

The present burden of taxation is heavy.
The revenues of the Government are suffi-
cient to justify substantial reductions and
the people of the country should receive the
benefits. No program, however, is feasible
if the Government is to be committed to new
and extraordinary expenditures. The rec-
ommendations for tax reduction set forth in
this letter are only possible if the Govern-
ment keeps within the program of expendi-
ture which the Bureau of the Budget has
laid down at the direction of the President.
New or enlarged expenditures would quickly
eat up the margin of revenue which now ap-
pears to be available for reducing the burden
of taxation, and to embark on any soldiers'
bonus such as was considered in the last Con-
gress or any other program calling for simi-
larly large expenditure would make it neces-
sary to drop all consideration of tax reduc-
tion and consider instead ways and means
for providing additional revenue. A sol-
diers' bonus would postpone tax reduction
not for one but for many years to come. It
would mean an increase rather than a de-
crease in taxes, for in the long run it could

190 TAXATION: THE PEOPLE'S BUSINESS

be paid only out of moneys collected by the
Government from the people in the form of
taxes. Throughout its consideration of the
problem the Treasury has proceeded on the
theory that the country would prefer a sub-
stantial reduction of taxation to the in-
creased taxes that would necessarily follow
from a soldiers' bonus, and I have faith to
believe that it is justified in that understand-
ing. Certainly there is nothing better calcu-
lated to promote the well-being and happi-
ness of the whole country than a measure
that will lift, in some degree, the burden of
taxation that now weighs so heavily on all.
Very truly yours,

A. W. MELLON,
Secretary of the Treasury.
Hon. WILLIAM R. GREEN,

Acting Chairman, Committee on Ways

and Means,

House of Representatives,
Washington, D. G.

APPENDIX A

191

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192 TAXATION: THE PEOPLE'S BUSINESS

This table shows the estimated gain or loss
in revenue over that estimated under the
present law, due to the proposed changes in
the Revenue Act of 1921, and allows for the
estimated increase in incomes by reason of
the readjustment of taxes.

The figures opposite each income tax
bracket cover the total estimated receipts
within that bracket.

APPENDIX A

193

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APPENDIX B

INCOME TAX ON EARNED INCOMES FROM $1,200 TO $6,000

1

SINGLE PERSON

MAKRIKD PERSON WITFI Two
DEPENDENT CHILDREN

NET

Present law

Proposed

Present law

Proposed

$1,200

$8

$4.50

1,400

16

9.00

. .

1,600

24

13.50

1,800

32

18.00

2,000

40

22.50

2,200

48

27.00

2,400

56

31.50

2,600

64

36.00

2,800

72

40.50

3,000

80

45.00

3,200

88

49.50

3,400

96

54.00

$4

$2'.25

3,600

104

58.50

12

6.75

3,800

112

63.00

20

11.25

4,000

120

67.50

28

15.75

4,200

128

72.00

36

20.25

4,400

136

76.50

44

24.75

4,600

144

81.00

52

29.25

4,800

152

85.50

60

33.75

5,000

160

90.00

68

38.25

6,200

176

99.00

96

54.00

5,400

192

108.00

104

58.50

5,600

208

117.00

112

63.00

5,800

224

126.00

120

67.50

6,000

240

135.00

128

72.00

194

APPENDIX B

195

INCOME TAX ON EARNED INCOMES FROM $1,200 TO $6,000

NET
INCOME

SINGLE PEKSON

MARRIED PERSON WITHOUT
DEPENDENT CHILDREN

Present law

Proposed

Present law

Proposed

$1,200

$8

$4.50

1,400

16

9.00

m

1,600

24

13.50

1,800

32

18.00

. .

2,000

40

22.50

••

2,200

48

27.00

. .

2,400

56

31.50

2,600

64

36.00

$4

$2*.25

2,800

72

40.50

12

6.75

3,000

80

45.00

20

11.25

3,200

88

49.50

28

15.75

3,400

96

54.00

36

20.25

3,600

104

58.50

44

24.75

3,800

112

63.00

52

29.25

4,000

120

67.50

60

33.75

4,200

128

72.00

68

38.25

4,400

136

76.50

76

42.75

4,600

144

81 .00

84

47.25

4,800

152

85.50

92

51.75

5,000

160

90.00

100

56.25

5,200

176

99.00

128

72.00

5,400

192

108.00

136

76.50

5,600

208

117.00

144

81.00

5,800

224

126.00

152

85.50

6,000

240

135.00

160

90.00

196 TAXATION: THE PEOPLE'S BUSINESS
INCOME TAX PAYABLE UPON CERTAIN EARNED NET INCOMES

NET
INCOME

SINGLE PERSON

HEAD OF FAMILY WITH Two
DEPENDENT CHILDREN

Present law

Proposed

Present law

Proposed

$1,000

$0.00

$0.00

$0.00

$0.00

2,000

40.00

22.50

0.00

0.00

3,000

80.00

45.00

0.00

0.00

4,000

120.00

67.50

28.00

15.75

5,000

160.00

90.00

68.00

38.25

6,000

240.00

135.00

128.00

72.00

7,000

330.00

180.00

186.00

99.00

8,000

420.00

22500

276.00

144.00

9,000

510.00

270.00

366.00

189.00

10,000

600.00

315.00

456.00

234.00

11,000

700.00

367.50

556.00

286.50

12,000

800.00

420.00

656.00

339.00

13,000

910.00

480.00

766.00

399.00

14,000

1,020.00

540.00

876.00

459.00

15,000

1,140.00

607.50

996.00

526.50

16,000

1,260.00

675.00

1,116.00

591.00

17,000

1,390.00

750.00

1,246.00

669.00

18,000

1,520.00

825.00

1,376.00

744.00

19,000

1,660.00

907.50

1,516.00

826.50

20,000

1,800.00

990.00

1,656.00

909.00

21,000

1,960.00

1,080 00

1,816.00

999.00

22,000

2,120.00

1,170.00

1,976.00

1,089.00

23,000

2,290.00

1,267.50

2,146.00

1,186.50

24,000

2,460.00

1,365.00

2,316.00

1,284.00

25,000

2,640.00

1,470.00

2,496.00

1,389.00

APPENDIX B

197

TABLE SHOWING THE TOTAL TAX PAYABLE UPON CERTAIN
INCOMES UNDER THE RATES OF THE PRESENT LAW AND
UNDER THE SUGGESTED RATES

NET

SINGLE PERSON
UNEARNED INCOME

MARRIED MAN WITH Two
DEPENDENTS
UNEARNED INCOME

INCOME

Present law

Proposed

Present law

Proposed

law

law

$30,000

$3,600

$2,720

$3,456

$2,612

40,000

5,920

4,600

5,776

4,492

50,000

8,720

6,740

8,576

6,632

100,000

30,220

19,900

30,076

19,792

150,000

58,220

35,400

58,076

35,292

200,000

86,720

50,900

86,576

50,792

250,000

115,720

66,400

115,576

66,292

300,000

144,720

81,900

144,576

81,792

400,000

202,720

112,900

202,576

112,792

500,000

200,720

143,900

260,576

143,792

1,000,000

550,720

298,900

550,576

298,792

APPENDIX O

Treasury Department
April 5, 1924.

ESTIMATED AMOUNT OF WHOLLY TAX-EXEMPT SECURITIES
OUTSTANDING FEBRUARY 29, 1921

(Revised basis} l

ISSUED BY

GKOS» AMOUNT

AMOTTNT HELD
IN TREASURY

OH IN

SIN KIN u FUNDS

AMOUNT HELD
OUTSIDE OP
TREASURY AND
SINKING FUNDS

States, counties,
cities, cto. . . .
Territories, insular
possessions, and
District of Co-
lumbia ....
United States Gov-
ernment . . .
Federal land banks,
intermediate
credit banks, and
joint stock land
banks

811,378,000,000

125,000,000
2,294,000,000

1,310,000,000

$1,707,000,000 «

20,000,000 •
755,000,000 «

104,000,000 *

$9,671,000,000

105,000,000
1,539,000,000

1,206.000,000

Total Fob 29, 1924

$15,107,000,000

$2,586,000,000

$12,521,000,000

Comparative totals:
December 31, 1923
December 3 1,1922
December 31, 19 IS
December 31, 1912

$14,885.000,000
13,652,000,000
9,50(5,000,000
6,554,000,000

$2,564,000,000
2,331.000,000
1,799,000,000
1,468,000,000

$12,321,000,000
11, .321,000,000
7,707,000,000
4,08(1,000,000

1 Since issuing the estimate of January 1, 1924, the method of estimating
has been revised and as a result both the gross amount of securities out-
standing and the amount held in sinking funds have been substantially
increased but the net amount outstanding except for the normal growth
has been changed but slightly.

a Total amount of State and local sinking funds.

' Total amount of sinking funds and amount held in trust by the Treasurer
of the United States.

« Amount held in trust by the Treasurer of the United States.

• Bee Note (4), also partly owned by the United States Government.

198

APPENDIX C

199

The Growth of Tax-Exempt Securities in the
United States

The amount of State and local securities
outstanding in the United States has in-
creased with greater rapidity than the
amount of corporate and other securities
(exclusive of United States Government se-
curities) during the past few years, as shown
in the following tables:

TABLE I. — TOTAL SECURITIES FLOATED IN THE UNITED
STATES, TOTAL STATE AND LOCAL SECURITIES, AND PER
CENT OF STATE AND LOCAL TO TOTAL 1912-1023

(000,000 omitted)

YEAR

TOTAL SECURITIES
FLOATED IN THE
UNITED STATKS
(EXCLUSIVE OF U. 8.
GOV'T OBLIGATIONS)

TOTAL STATE AND
LOCAL SECURITIES
FLOATED IN THE
UNITED STATES

PER CENT
OF STATE
AND LOCAL
TO TOTAL

1912 . . .

$3,952 *

$387

9.79

1913 . . .

2,952 i

403

13.65

1914 . . .

2,998 *

474

15.81

1915 . . .

3,998 *

499

12.48

1916 . . .

5,438 i

457

8.40

1917 . . .

3,641 l

451

12.39

1918 . . .

2,877 J

297

10.32

1919 . . .

4,286

692

16.15

1920 . . .

4,010

683

17.03

1921 . . .

4,204

1,209

28.76

1922 . . .

5,245

1,102

21.01

1923 . . .

4,986

1.032

20.70

i The figures of total securities floated in the United States 1912-1018 are
estimate* made by the Harvard University Committee on Economic Re-
search based upon data from various sources. They are supposed to in-
clude both foreign and domestic securities, new and refunding, floated in
the United States during the period in question. All other figures are
taken from the Commercial and Financial Chronicle.

200 TAXATION: THE PEOPLE'S BUSINESS

TABLE II. — NEW CAPITAL ISSUES OF CORPORATIONS AND

STATES AND MUNICIPALITIES IN THE UNITED STATES

1913-1923

AMOUNTS

INDEX NUMBERS

(1910 BASIS)

YEAR

Corporate
Securities

State and Local
Securities

Corporate
Securities

State and
Local
Securities

1913

$1,646,000,000

$376,234,691

71

55

1914

1,437,000,000

1 464,727,871

62

69

1915

1,435,000,000

466,433,730

62

69

1916

2,187,000,000

433,735,031

95

64],

1917

1,530,000,000

435,873,593

66

64

191cS

1,345,000,000

286,831,077

58

42 '

1919

2,303,328,636

678,187,262

100

100

1920

2,710,011,386

671,765,574

118

99 I

1921

1,823,004,851

1,199,396,561

79

177

1922

2,335,734,207

1,070,901,057

101

158

1923

2,730,796,155

1,013,786,164

119

149

Corporate issues 1913-1918 from Review of Economic Statistics (Har-
vard University Press \ May 25, 1921, p. 98. Includes both new and re-
funding issues; these figures include only those which have been reported
and not additional estimates. All other figures from the Commercial and
Financial Chronicle.

Table I shows that State and local securi-
ties have constituted a much larger propor-
tion of the securities floated in the United
States since 1919 than they did in earlier
years. Table II differs from Table I in
that only corporate securities have been used
in the first column and that refunding issues
have been omitted wherever possible. In
the eleven years shown the amount of State

APPENDIX C 201

and local securities issued annually has in-
creased with greater rapidity than the
amount of corporate securities. The index
numbers show that the great increase in the
State and local securities issued in the last
three years has not been paralleled by issues
of corporate securities.

TABLE III. — ESTIMATED AMOUNT OF WHOLLY TAX-EXEMPT
SECURITIES IN THE UNITED STATES, EXCLUSIVE OF THOSE
HELD IN TREASURY, SINKING AND TRUST FUNDS. 1912-
1923 l

DECEMBER 31 TAX EXEMPT-SECURITIES

1912 $4,086,000,000

1913 4,338,000,000

1914 4,789,000,000

1915 5,188,000,000

1916 5,623,000,000

1917 7,994,000,000

1918 7,707, 000,000 2

1919 8,506,000,000 »

1920 9,804,000,000

1921 10,586,000,000

1922 11,321,000,000

1923 12,309,000,000

1 The figures for State and local debt for 1912 and 1922 are baaed on the
Census compilations. For the intermediate year interpolations have been
made on the basis of annual issues. The actual amounts of Federal Gov-
ernment and Farm loan tax-exempt issues have been added to the estimates
for each year.

« The decline in 1918 was due to the fact that very few State and local
bonds were issued, and over half a billion of wholly tax-exempt First
Liberty 3>£ per cent bonds were converted during the year to 4's or 4>i s
which are not wholly tax exempt.

• This does not include the Victory 3$£ per cent notes outstanding, as
separate figures for the Victory 394's and 4&'s were not available for 1919.
The Victory 3^'a are included in 1920 and 1921, but not in 1922, as they
matured before the end of the year.

Table III includes all wholly tax-exempt
securities outstanding except those in the

202 TAXATION: THE PEOPLE'S BUSINESS

United States Treasury, sinking funds and
trust funds. Both in 1912 and in 1922 the
State and local securities composed about
three-fourths of the total tax-exempt securi-
ties outstanding. Reliable figures as to the
amounts of all other securities outstanding
are not available.

APPENDIX D

LETTER FROM MR. A. W. GREGG, ASSISTANT TO

THE SECRETARY OF THE TREASURY,

TO THE HON. W. B. GREEN

The letter from Mr. A. W. Gregg, Assistant
to the Secretary of the Treasury, is, in part,
as follows :

January 4, 1924.
Hon. W. E. GREEN,

Chairman Ways and Means Committee,

House of Representatives.

MY DEAR MR. CHAIRMAN: Prior to its ad-
journment before the holidays the committee
requested that I prepare for the assistance
of the committee a digest of the decisions
and arguments affecting the question of
whether Congress has the power to levy a tax
upon the income from securities issued by
States or political subdivisions thereof. In
accordance with that request the following is
submitted.

Two questions will be considered, (1)
whether the Federal Government has the gen-

203

204 TAXATION: THE PEOPLE'S BUSINESS

eral power to lay a tax upon income derived
from securities issued by States or political
subdivisions thereof; (2) in the event that
Congress may not lay a tax upon income from
all such securities, whether the income from
any obligation issued by States or political
subdivisions thereof may be taxed by the
Federal Government.

The earliest decision of the Supreme Court
upon the question of the power of the United
States to tax State instrumentalities is The
Collector v. Day (1870), 11 Wall. 113. Un-
der the Civil War income tax acts a tax was
assessed on the salary of Hay, a probate
judge in Massachusetts. He paid the tax
under protest and brought action to recover
it. It was held by the Supreme Court that
Congress had no power to impose a tax upon
the salary of a State judicial officer. The
court cited Dobbins v. Commissioners (1842),
16 Pet. 435; McCulloch v. Maryland (1819),
4 Wheat. 316; and Weston v. Charleston
(1829), 2 Pet. 449, as establishing the propo-
sition "that the State governments can not
lay a tax upon the constitutional means em-
ployed by the Government of the Union to
execute its constitutional powers, " and con-
cluded that, on the same principle, the United

APPENDIX D 205

States cannot tax the means and instrumen-
talities employed by the States for carrying
on their governmental operations. The
court's reasoning is indicated in the follow-
ing passage (pp. 125, 187) :

It is admitted that there is no express
provision in the Constitution that pro-
hibits the General Government from tax-
ing the means and instrumentalities of the
States, nor is there any prohibiting the
States from taxing the means and instru-
mentalities of that Government. In both
cases the exemption rests upon necessary
implication and is upheld by the great
law of self-preservation; as any govern-
ment, whose means are employed in con-
ducting its operations, if subject to the
control of another and distinct govern-
ment, can exist only at the mercy of that
government.

* * * the means and instrumentalities
employed for carrying on the opera-
tions of their governments, for preserving
their existence, and fulfilling the high and
responsible duties assigned to them in the
Constitution, should be left free and un-
impaired, should not be liable to be crip-

206 TAXATION: THE PEOPLE'S BUSINESS

pled, much less defeated, by the taxing
power of another government * * *

This decision was followed in the cases of
a judge of the superior court of New York
City (Freedman v. Sigel (1875), Fed Gas. No.
5989) and of a State's attorney in Maryland
(U. S. v. Kitchie (1872), Fed. Gas. No. 16168).

In the case of Pollock v. Farmer's Loan &
Trust Co. (1895), 157 U. S. 429, a bill by
a stockholder to enjoin the defendant cor-
poration from paying an income tax under
the act of August 15, 1894 (28 Stat. 309), it
was urged that the act was unconstitutional
on the grounds, (1) that in imposing a tax on
the income or rents of real and personal prop-
erty, it imposed a direct tax upon the prop-
erty itself, which was void because not ap-
portioned among the Stal js; (2) that in im-
posing indirect taxes, ic violated the consti-
tutional requirement of uniformity; (3) that
in imposing a tax upon income received from
State and municipal bonds, it exceeded the
constitutional powers of the Federal Govern-
ment. With reference to this third point,
Chief Justice Fuller said (p. 585) :

It is contended that alth' agh the prop-
erty or revenues of the States or their in-

APPENDIX D 207

strumentalities cannot be taxed, never-
theless the income derived from State,
county and municipal securities can be
taxed. But we think the same want of
power to tax the property or revenues of
the States or their instrumentalities ex-
ists in relation to a tax on the income
from their securities, and for the same
reason, and that reason is given by Chief
Justice Marshall in Weston v. Charles-
ton, 2 Pet. 449, 468, where he said: "The
right to tax the contract to any extent,
when made, must operate upon the power
to borrow before it is exercised, and have
a sensible influence on the contract. The
extent of this influence depends on the
will of a distinct government. To any
extent, however inconsiderable, it is a
burden on the operations of government.
It may be carried to an extent which shall
arrest them entirely. * * * The tax on
Government stock is thought by this
court to be a tax on the contract, a tax
on the power to borrow money on the
credit of the United States, and conse-
quently to be repugnant to the Constitu-
tion/' Applying this language to these
municipal securities, it is obvious that

208 TAXATION: THE PEOPLE'S BUSINESS

taxation on the interest therefrom would
operate on the power to borrow before it
is exercised, and would have a sensible in-
fluence on the contract, and that the tax
in question is a tax on the power of the
States and their instrumentalities to bor-
row money, and consequently repugnant
to the Constitution.

It is clear, therefore, that prior to the adop-
tion of the sixteenth amendment Congress
had no power to levy a tax, directly or in-
directly, upon securities issued by States or
a political subdivision thereof. There re-
mains to be considered the effect of the six-
teenth amendment.

The sixteenth amendment provides that:
"The Congress shall have power to lay and
collect taxes on incomes, from whatever
source derived, without apportionment
among the several States and without regard
to any census or enumeration.'7

At the time the sixteenth amendment was
being considered by the legislatures of the
several States it was urged by various writers
and public men {hat the proposed amendment
gave Congress the power to tax the salaries
of officers and employees of the States and

APPENDIX D 209

the income from State and municipal securi-
ties. (See Foster, Income Tax, p. 78 et seq. ;
Miner, The Proposed Income Tax Amend-
ment, 15 Va. L. Reg. 737, 753; Hubbard, The
Sixteenth Amendment, 33 Harvard Law Re-
view, 794.) The contrary view was urged
with equal strength. (See Cong. Rec., vol.
45, pp. 1694-1699, 2245-2247, 2539-2540, and
Ritchie, Power of Congress to Tax State Se-
curities, 5 Am. Bar Assoc. Journal, 602.)

In the first case which arose under the six-
teenth amendment, the case of Brushaber v.
Union Pacific R. R. Co., 240 U. S. 1, the Su-
preme Court committed itself on the question
of whether or not the sixteenth amendment
gave to Congress any new power of taxation.
This case was a suit by a stockholder to re-
strain the defendant corporation from paying
an income tax imposed by the tariff act of
1913, on the ground that it was unconsti-
tutional. Chief Justice White, in the course
of upholding the validity of the act, said (pp.
17, 18, 19) :

It is clear on the face of this text that
it (the amendment) does not purport to
confer power to levy income taxes in a
generic sense — an authority already pos-

210 TAXATION: THE PEOPLE'S BUSINESS

sessed and never questioned — or to limit
and distinguish between one kind of in-
come taxes and another, but that the whole
purpose of the amendment was to relieve
all income taxes when imposed from ap-
portionment from a consideration of the
source whence the income was derived.
Indeed, in the light of the history which
we have given and of the decision in the
Pollock case and the ground upon which
the ruling in that case was based, there
is no escape from the conclusion that the
amendment was drawn for the purpose of
doing away for the future with the prin-
ciple upon which the Pollock case was
decided; that is, of determining whether
a tax on income was direct, not by a con-
sideration of the burden placed on the
taxed income upon which it directly op-
erated, but by taking into view the burden
which resulted on the property from which
the income was derived, since in express
terms the amendment provides that in-
come taxes, from whatever source the in-
come may be derived, shall not be sub-
jected to the regulation of apportion-
ment. * * *

Indeed, from another point of view, the

APPENDIX D 211

amendment demonstrates that no such
purpose was intended and on the contrary
shows that it was drawn with the object
of maintaining the limitations of the Con-
stitution and harmonizing their opera-
tion. * * *

* * * The purpose was not to
change the existing interpretation except
to the extent necessary to accomplish the
result intended ; that is, the prevention of
the resort to the sources from which a
taxed income was derived in order to
cause a direct tax on the income to be a
direct tax on the source itself and thereby
to take an income tax out of the class of
excises, duties and imposts and place it
in the class of direct taxes.

Again, in Staiiton v. Baltic Mining Co.
(1916), 240 U. S. 103, an action in form simi-
lar to the Brushaber case, Chief Justice
White said, in upholding the constitutionality
of the same act (p. 112) :

* * * But aside from the obvious error
of the proposition intrinsically con-
sidered, it manifestly disregards the fact
that by the previous ruling it was settled
that the provisions of the sixteenth

212 TAXATION: THE PEOPLE'S BUSINESS

amendment conferred no new power of
taxation, but simply prohibited the previ-
ous complete and plenary power of in-
come taxation possessed by Congress
from the beginning from being taken out
of the category of indirect taxation to
which it inherently belonged and being
placed in the category of direct taxation,
subject to apportionment by a considera-
tion of the sources from which the income
was derived; that is, by testing the tax
not by what it was — a tax on income, but
by a mistaken theory deduced from the
origin or source of the income taxed.
Hark, of course, in saying this we are
not here considering a tax not within the
provisions of the sixteenth amendment;
that is, one in which the regulation of ap-
portionment or the rule of uniformity is
wholly negligible, because the tax is one
entirely beyond the scope of the taxing
power of Congress and where conse-
quently no authority to impose a burden
either direct or indirect exists.

Similar dicta occur in Eisner v. Macomber
(1920), 252 U. S. 189, 204, and in Peck & Co.
v. Lowe (1915), 247 U. S. 165.

APPENDIX D 218

Although it appears that in none of these
cases was it necessary to pass upon the issue,
it is significant that the court saw fit to
announce in each of them that the amendment
did not extend the taxing power of Congress
to cover any new subjects.

The opinion of Evans v. Gore (1920), 253
U. S. 245, throws a more direct light upon
the views of the Supreme Court regarding
the scope of the sixteenth amendment. The
action therein was brought by a United States
district judge, appointed in 1899, to recover
a tax paid upon his salary under the revenue
act of 1918 (40 Stat. 1062). His chief con-
tention was that the effect of the act, in im-
posing a tax on his salary, was to diminish
his compensation, and that to this extent
was repugnant to the third article of the Con-
stitution, providing that his salary should not
be diminished during his continuance in of-
fice. The court came to the conclusion that
the prohibition prevented diminution by tax-
ation, and the court, after reciting the his-
tory of the adoption of the sixteenth amend-
ment, concluded:

True, Governor Hughes, of New York,
in a message laying the amendment before

214 TAXATION: THE PEOPLE'S BUSINESS

the legislature of that State for ratifica-
tion or rejection, expressed some appre-
hension lest it might be construed as ex-
tending the taxing power to income not
taxable before ; but his message promptly
brought forth from statesmen who par-
ticipated in proposing the amendment
such convincing expositions of its pur-
pose, as here stated, that the apprehension
was effectively dispelled and ratification
followed.

Thus the genesis and words of the
amendment unite in showing that it does
not extend the taxing power to new and
excepted subjects, but merely removes all
occasion otherwise existing for an appor-
tionment among the States of taxes laid
on income, whether derived from one
source or another. And we have so held
in other cases.

In conclusion, then, it is evident that, since
the ratification of the sixteenth amendment,
the Supreme Court of the United States, in
dicta and decision, has consistently adhered
to the view that the amendment does not ex-
tend the taxing power of Congress to new
or excepted subjects. Prior to the adoption

APPENDIX D 215

of the sixteenth amendment, it was estab-
lished that, in general, income from State
and municipal bonds was exempt from taxa-
tion by the Federal Government. In view of
these two lines of decisions it appears evi-
dent to me that, in the absence of a consti-
tutional amendment, a tax upon the income
derived from State and municipal securities
would be held by the Supreme Court to be
beyond the constitutional powers of Con-
gress.

******

Eespectfully,

A. W. GEEGG.

APPENDIX E

ADDBESS OF THE PBESEDEBTT OF THE UNITED

STATES BEFORE THE NATIONAL! REPTJBLJ-

OAK CL.TJB AT THE WAXJDOBF-ASTOBIA,

NEW YOBK, FEBBUABY 12, 1924

The President said, in part, as follows :
Out of an income of about $60,000,000,000 a
year the people of this country pay nearly
$7,500,000,000 in taxes, which is over $68 for
every inhabitant of the land. Of this amount
the National Government collects about $3,-
200,000,000, and the State and local govern-
ments about $4,300,000,000. As a direct bur-
den this is a stupendous sum, but when it is
realized that in the course of our economic
life it is greatly augmented when it reaches
the consumer in the form of the high cost of
living, its real significance begins to be ap-
preciated. The national and local govern-
ments ought to be unremitting in their efforts
to reduce expenditures and pay their debts.
This the National Government is earnestly
seeking to do. The war cost of more than

216

APPENDIX B 217

$40,000,000,000 is already nearly half paid.
Amid the disordered currencies of the war-
ring nations our money is, and has been main-
tained, at the gold standard. Our budget has
long since been balanced, and our debt-paying
program is at the rate of $500,000,000 each
year. In spite of all these expenditures, the
next fiscal year has an estimated surplus
revenue of over $300,000,000.

This represents a great financial achieve-
ment in the past three years. In the first
place, it was necessary to provide for more
than $7,000,000,000 of short-term securities.
These have all either been paid or refunded,
so that they will become due in the future at
orderly intervals, when they can be retired
or further extended. When it is realized that
such large loans were made in a way that not
only left business undisturbed, but was
scarcly perceptible to the public, the skill
with which Secretary Mellon managed them
can well be appreciated.

Coincident with this was the even greater
task of reducing national expenditures.
Through legislative enactment and executive
effort this has gone steadily forward, and is
now proceeding from day to day. Under the
watchful care of the Budget Bureau every

218 TAXATION: THE PEOPLE'S BUSINESS

department is constantly striving to elimi-
nate all waste and discard every unnecessary
expense.

Every reasonable effort has been made to
secure the liquidation of our international
debts. The largest, which was that of Great
Britain, and which amounted with accumu-
lated interest to $4,600,000,000, has been set-
tled on terms that provide for its payment
over a period of 62 years. Interest runs at
3 per cent until 1933, and after that 3^2 per
cent. This calls for payments in the imme-
diate future of $160,000,000 and more a year.
They have the option to pay us in our own
bonds, and in its practical working this agree-
ment does not involve cash payments to this
country, but pimply a mutual cancellation of
debts. The funding of the British debt was
one of the greatest of international financial
transactions. It had its effect on business
confidence, which was world wide. It demon-
strated the determination of a great empire
faithfully to discharge its international obli-
gations. In this respect it was much more
than a financial transaction, it was an exhi-
bition of the highest type of international
honor. It showed that the moral standards
of the world were going to be maintained.

APPENDIX B 219

All of this has laid the foundation for na-
tional tax reduction and reform. In time of
war finances, like all else, must yield to na-
tional defense and preservation. In time of
peace finances, like all else, should minister to
the general welfare. Immediately upon my
taking office it was determined after confer-
ence with Secretary Mellon that the Treas-
ury Department should study the possibility
of tax reduction for the purpose of securing
relief to all taxpayers of the country and
emancipating business from unreasonable
and hampering exactions. The result was the
proposed bill, which is now pending before
the Congress. It is doubtful if any measure
ever received more generous testimony of
approval. Opposition has appeared to some
of its details, but to the policy of immediate
and drastic reduction of taxes, so arranged
as to benefit all classes and all kinds of busi-
ness, there has been the most general appro-
bation. These recommendations have been
made by the Treasury as the expert financial
adviser of the Government. They follow, in
their main principle of a decrease in high
surtaxes, which is only another name for war
taxes, the views of the two preceding Secre-
taries of the Treasury, both of them Demo-

220 TAXATION: THE PEOPLE'S BUSINESS

crats of pronounced ability. They are non-
partisan, well thought out, and sound. They
carry out the policy of reducing the taxes of
everybody, especially people of moderate
income. They give to the country almost a
million dollars every working day.

The proposed bill maintains the fixed policy
of rates graduated in proportion to ability
to pay. That policy has received almost uni-
versal sanction. It is sustained by sound
arguments based on economic, social, and
moral grounds. But in taxation, like every-
thing else, it is necessary to test a theory by
practical results. The first object of taxation
is to secure revenue. When the taxation of
large incomes is approached with that in
view, the problem is to find a rate which will
produce the largest returns. Experience
does not show that the higher rate produces
the larger revenue. Experience is all in the
other way. When the surtax rate on incomes
of $300,000 and over was but 10 per cent,
the revenue was about the same as when it
was at 65 per cent. There is no escaping the
fact that when the taxation of large incomes
is excessive, they tend to disappear. In 1916
there were 206 incomes of $1,000,000 or more.
Then the high tax rate went into effect.

APPENDIX B 221

The next year there were only 141,
and in 1918 but 67. In 1919 the num-
ber declined to 65. In 1920 it fell to 33,
and in 1921 it was further reduced to 21. I
am not making any argument with the man
who believes that 55 per cent ought to be
taken away from the man with $1,000,000 in-
come, or 68 per cent from a $5,000,000 income ;
but when it is considered that in the effort to
get these amounts we are rapidly approach-
ing the point of getting nothing at all, it is
necessary to look for a more practical
method. That can be done only by a reduc-
tion of the high surtaxes when viewed solely
as a revenue proposition, to about 25 per
cent.

I agree perfectly with those who wish to
relieve the small taxpayer by getting the
largest possible contribution from the people
with large incomes. But if the rates on large
incomes are so high that they disappear, the
small taxpayer will be left to bear the entire
burden. If, on the other hand, the rates are
placed where they will produce the most rev-
enue from large incomes, then the small tax-
payer will be relieved. The experience of the
Treasury Department and the opinion of the
best experts place the rate which will collect

222 TAXATION: THE PEOPLE'S BUSINESS

most from the people of great wealth, thus
giving fhe largest relief to people of moderate
wealth, at not over 25 per cent.

A very important social and economic ques-
tion is also involved in high rates. That is
the result taxation has upon national devel-
opment. Our progress in that direction
depends upon two factors — personal ability
and surplus income. An expanding pros-
perity requires that the largest possible
amount of surplus income should be invested
in productive enterprise under the direction
of the best personal ability. This will not
be done if the rewards of such action are very
largely taken away by taxation. If we had
a tax whereby on the first working day the
Government took 5 per cent of your wages,
on the second day 10 per cent, on the third
day 20 per cent, on the fourth day 30 per
cent, on the fifth day 50 per cent, and on the
sixth day 60 per cent, how many of you would
continue to work on the last two days of the
week? It is the same with capital. Surplus
income will go into tax-exempt securities.
It will refuse to take the risk incidental to
embarking in business. This will raise the
rate which established business will have to
pay for new capital, and result in a marked

APPENDIX E 223

increase in the cost of living. If new capital
will not flow into competing enterprise the
present concerns tend toward monopoly, in-
creasing again the prices which the people
must pay.

The high prices paid and low prices re-
ceived on the farm are directly due to our
unsound method of taxation. I shall illus-
trate this by a simple example: A farmer
ships a steer to Chicago. His tax, the tax
on the railroad transporting the animal, and
of the yards where the animal is sold, go into
the price of the animal to the packer. The
packer's tax goes into the price of the hide
to the New England shoe manufacturer. The
manufacturer's tax goes into the price, to the
wholesaler, and the wholesaler's tax goes
into the price to the retailer, who in turn adds
his tax in the price to the purchaser. So it
may be said that if the farmer ultimately
wears the shoes he pays everybody's taxes
from the farm to his feet. It is for these
reasons that high taxes mean a high price,
level, and a high price level in its turn means
difficulty in meeting world competition.
Most of all, the farmer suffers from the
effect of this high price level. In what he
buys he meets domestic costs of high taxes

224 TAXATION: THE PEOPLE'S BUSINESS

and the high price level. In what he sells he
meets world competition with a low price
level. It is essential, therefore, for the good
of the people as a whole that we pay not so
much attention to the tax paid directly by
a certain number of taxpayers, but we must
devote our efforts to relieving the tax paid
indirectly by the whole people.

Taken altogether, I think it is easy enough
to see that I wish to include in the program a
reduction in the high surtax rates, not that
small incomes may be required to pay more
and large incomes be required to pay less,
but that more revenue may be secured from
large incomes and taxes on small incomes
may be reduced ; not because I wish to relieve
the wealthy, but because I wish to relieve the
country.

The practical working out of the proposed
schedules is best summarized by the Treas-
ury experts, who find that $92,000,000 a year
will be saved to those who have incomes
under $6,000; $52,000,000 to those who have
incomes between $6,000 and $10,000 ; and that
less than 3 per cent of the proposed reduc-
tion would accrue to those who have incomes
of $100,000 or more. A married man with
two children, having an income of $4,000,

APPENDIX E 225

would have his tax reduced from $28 to
$15.75; having $5,000, from $68 to $38.25;
having $6,000, from $128 to $72; having
$8,000, from $276 to $144; and having
$10,000, from $456 to $234.

In order to secure these results, the admin-
istration bill proposes to reduce the tax on
earned income 25 per cent, and the normal
tax on unearned income also 25 per cent.
This would apply to all incomes alike, great
and small, and would provide general and
extensive relief. Further reductions would
be secured by increasing the amount of in-
come, exempt from surtaxes, from $6,000 to
$10,000. Such surtaxes increase progres-
sively until on incomes of $100,000 or more
they reach the maximum of 25 per cent which,
with the normal tax of 6 per cent, make
large incomes pay in all 31 per cent. It is
also proposed to repeal many troublesome
and annoying rates, such as admission taxes
and sales taxes, the existence of which is
reflected in the increased cost of doing busi-
ness and the higher prices required from the
people.

That is the tax measure which has been
proposed, and which has my support. Be-
cause I wish to give to all the people all the

226 TAXATION: THE PEOPLE'S BUSINESS

relief which it contains, I am opposed to
material alteration or to compromise. It is
about as far removed as anything could be
from any kind of partisanship. At least, I
do not charge that there is any party or any
responsible party leadership that admits it
is opposed to making taxes low and in favor
of keeping taxes high. But the actions and
proposals of some are liable to have just that
result. I stand on the simple proposition
that the country is entitled to all the relief
from the burden of taxation that it is pos-
sible to give. The proposed measure gives
such relief. Other measures which have
been brought forward do not meet this re-
quirement. They have the appearance of
an indirect attempt to defeat a good measure
with a bad measure. You have heard much
of the Garner plan. Brought forward to
have something different, it purported to re-
lieve the greatest number of taxpayers. It
gave not the slightest heed to the indirect
effect of high taxes, or to the approaching
drying up of the source of revenue and con-
sequent failure of the progressive income
tax, or to the destruction of business initia-
tive. It is political in theory. When the
effect of its provisions was estimated, it

APPENDIX E 227

meant a loss of revenue beyond the expected
surplus. It is impossible in practice. The
people will not be misled by such proposals.
It is entirely possible to have a first-class
bill. I want the country to have the best
there is. I am for it because it will reduce
taxes on all classes of income. I am for it
because it will encourage business. I am for
it because it will decrease the cost of living.
I am for it because it is economically, so-
cially, and morally sound.

But the people of the Nation must under-
stand that this is their fight. They alone can
win it. Unless they make their wishes known
to the Congress without regard to party this
bill will not pass. I urge them to renewed
efforts.